Pension tax allowances

Pension tax allowances

The Annual Allowance

The Annual Allowance is the maximum amount of pension contributions an individual can invest in any tax year while still receiving tax relief. It applies to all contributions, from you or any employer, paid into all of your pension arrangements over a tax year.

In the 2018/19 tax year, the Annual Allowance will be £40,000 for most people. However, individuals deemed to have income over £150,000 will have a reduced Annual Allowance. (If you are unsure what your Annual Allowance is, you should speak to an independent financial adviser.)

If the contributions going into your policy during the tax year exceed the Annual Allowance then the amount you have contributed above the Annual Allowance is added to your taxable income. You will pay tax on this at your highest rate, unless you carry forward any unused Annual Allowance from the previous three tax years.

If the total payments into the Plan made by you and your employer, plus contributions made to any other pension arrangements, are likely to be close to the Annual Allowance in any tax year, please seek financial advice before making any decisions.

If you draw your benefits due to ill health then provided you satisfy the requirements set by HM Revenue & Customs, or if you die while still building up your fund, the Annual Allowance will not apply in that year.

The Money Purchase Annual Allowance

If certain trigger events occur, the contributions that qualify for tax relief are limited to a Money Purchase Annual Allowance of £4,000 a year. Trigger events include accessing your retirement savings through a drawdown arrangement, payment of an Uncrystallised Fund Pension Lump Sum, or taking more than the permitted maximum income under a Capped Drawdown or Flexible Drawdown taken prior to 6 April 2015.

Please seek financial advice before you proceed with a trigger event if you are close to the £4,000 Money Purchase Annual Allowance.

The Lifetime Allowance

The Lifetime Allowance applies to the value of all the pension benefits you build up from all sources over your working life (apart from the State). This includes the total value of your Account in the Plan. For the 2017/18 tax year the allowance is £1 million.

You can build up benefits over the Lifetime Allowance, but you would have to pay a tax charge on the excess. This charge is 25% if you take these excess benefits as a pension or annuity, which would then be subject to Income Tax. It rises to 55% if you take the excess as cash.

Please note that the Lifetime Allowance also applies to death benefits paid in lump sum form. If these benefits, along with any other pensions or cash sums being paid, go over the allowance, a charge of 55% will apply to the excess, unless it is used to provide dependants’ pensions.

If you think your contributions or benefits may be close to any of the allowances, please consider taking financial advice.

*Widow’s pensions and other pensions paid following the death of someone else may be ignored. Overseas pensions may or may not be included, depending on the circumstances.
Important note

Do you have Primary, Enhanced, Fixed Protection, Fixed Protection 2014 or have applied for/are going to apply for Individual Protection 2014, Individual Protection 2016 or Fixed Protection 2016?

If you join an employer’s pension plan and/or life assurance scheme, either by completing an application form or as a result of automatic enrolment, you will lose your Enhanced or Fixed Protection.

If you join an employer’s pension plan through automatic enrolment but opt out within the 30-day opt out period, you will be treated as if you have never been a member and will not lose your protection.

If you have Primary Protection or if you have applied for/are going to apply for Individual Protection 2014 or Individual Protection 2016, pension contributions can continue to be paid into your pension policy. Please note that any pension savings in excess of your protected Lifetime Allowance will be subject to a Lifetime Allowance charge.

More information on Lifetime Allowance protection and automatic enrolment is available on the HMRC website.

Neither your employer nor the Plan provider are responsible for any tax charge or loss of tax relief you incur through joining or being automatically enrolled into any pension or life assurance arrangement(s).