I READ your article about the tax relief limit for contributions to a Guernsey-approved pension being reduced to £35,000 per year, but can you explain exactly what tax relief is?
Sean Gillease, business development manager, Sovereign Trust (Channel Islands) Ltd, replies:
TAX RELIEF on pension contributions is the States of Guernsey’s way of encouraging and incentivising people to make savings for their retirement. In simple terms, for every £100 paid as salary, only £80 is received by you as 20% Guernsey income tax is deducted by your employer. This 20% is not deducted for contributions made into your pension, therefore £100 paid from your salary equals £100 received into your pension.
Essentially the 20% tax that would usually be payable on your salary is not paid for contributions into your pension, up to a certain limit. At the time you ultimately choose to take benefit from your pension scheme (minimum age 50), you will be entitled to a pension commencement lump sum of up to a maximum of 30% of the value of your pension, this will be paid tax free up to a maximum pension value of £646,667 (i.e. maximum tax free lump sum of £194,000).
Any lump sum amount above this level and on-going regular income drawn down from your pension will be subject to 20% income tax, which will be withheld at source by the pension provider.
By providing tax relief on the contributions made into your pension and then taxing the income paid to you out of your pension at a later date, you will have received the benefit of a higher amount being held in your pension from which to accumulate interest and additional investment returns. This ultimately gives the most opportunity for you to build as significant a pension pot as possible.
The current annual tax relief limit in Guernsey is £35,000, but there are provisions for married couples and for anyone who has not used their full entitlement in previous years. Further information can be found on the following website: https://www.gov.gg/taxpensions.
If you had further questions, I would recommend that you speak with an independent adviser.
Read the full Business Panel article here.