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 2024/25 tax year, the Annual Allowance will be £60,000 for most people. However, individuals deemed to have income over £260,000 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 £10,000 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 £10,000 Money Purchase Annual Allowance.

The Lifetime Allowance

Since 6 April 2006, there has been a limit on the pension savings an individual can build up in their lifetime without being subject to tax charges, known as the lifetime allowance (LTA).

In the 2023 spring budget, the Chancellor announced that with effect from 6 April 2023 there would be no tax charge on any benefits over the LTA and, with effect from 6 April 2024, the LTA would be removed completely.

Instead, as at 6 April 2024, there will be a maximum amount you can take from all your pensions as tax-free lump sums over your lifetime (either Pension Commencement Lump Sums (PCLS) or Uncrystallised Pension Fund Lump Sums (UFPLS)). This is the lump sum allowance (LSA) and for most people it will be the maximum of £268,275 or 25% of the value of your benefits.

Individuals will be responsible for providing information to their schemes on any lump sums taken from other registered pension schemes.

If you previously applied for lifetime allowance protection from HMRC, you may be able to take more of your pensions as tax-free cash, subject to 25% of your total benefits.

Any amount you take as cash over the LSA will be taxed as income.

Death benefits

In the event of your death, any remaining pension within your guarantee period will normally be paid as a lump sum. This lump sum is tax-free if you die before age 75 and it’s paid within two years of your death.

As at 6 April 2024, there is a maximum amount of tax-free lump sum death benefit that can be paid. This is the lump sum death benefit allowance (LSDBA) and for most people it will be £1,073,100.

The following are measured against this allowance:

  • Death benefit lump sums from any scheme paid on your death
  • Serious ill-health lump sums paid to you before your death
  • Certain tax-free cash lump sums paid to you before your death

If these add up to more than the allowance, then tax is paid on the excess.

The above limits on tax-free cash lump sums will apply as at 6 April 2024. If you have taken benefits already then some of your LSA or LSDBA may be counted as having been used if you come to take more benefits after April 2024. The underlying calculations are complicated so please contact us if you think this applies to you.

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).

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