Before pension benefits are taken, which tax treatment applies to pension funds?

• A. Not subject to income tax or capital gains tax and there is tax relief on contributions.
• B. Subject to income tax on contributions.
• C. Subject to capital gains tax on growth.
• D. Taxed at a flat rate upon withdrawal.

Answer: (B)

Pension funds are designed to be tax-advantaged while you’re saving for retirement. Contributions receive tax relief, so you effectively get back some of the tax you would have paid, reducing the cost of saving. The money inside the pension grows without being subject to income tax or capital gains tax, because taxation is deferred until you draw benefits. So, before benefits are taken, the tax treatment is that there is tax relief on contributions and no income tax or capital gains tax on the fund’s growth. Taxes are typically due when you start withdrawing benefits, usually as income, not as capital gains.