Pensions are currently subject to tax breaks from the government, but they are not entirely tax free.
Once a pension fund starts paying out (whether state or a private pension), it is counted as taxable income.
Prior to this, however, there are considerable tax benefits to pensions.
Firstly, money placed in pensions is exempt from income tax. This means that for every pound of take-home pay put in a pension fund, the government repays the income tax on it – offering a potential 40 per cent boost (for higher rate tax payers).
Pension fund growth is not taxed, although dividends from stocks held in pension funds are. Pensions are also exempt from capital gains tax.
However, pension contributions over tax limits – up to the value of their annual salary or £215,000, whichever is lower – or income on funds worth more than the Lifetime Allowance (currently £1.5 million) are subject to tax.