Pensions and tax
This page briefly covers the Annual Allowance and Lifetime Allowance tax limits that apply to pensions. Tax and pensions can be quite complex and we have tried to keep the information as brief and understandable as possible.
HM Revenue & Customs - external link - have further information on their website regarding Annual Allowance and Lifetime Allowance. Please note that at the time this page was published their website was being updated. If you have any questions please don't hesitate to contact us.
Annual Allowance is the maximum amount of pension saving you can have each year that benefits from tax relief. This includes deemed contributions to defined benefit schemes such as Classic, Classic Plus, Premium and Nuvos and actual contributions made by you and your employer to a defined contribution scheme (such as a Partnership Pension Account or in house AVC's with Scottish Widows or Standard Life). The current annual allowance limit is £40,000. This decreased from the year 2013-14 when the limit was £50,000.
Although potentially anyone could breach the Annual Allowance in future, there are groups of members that may be more at risk than others:
- Certain pay/salary levels; eg over £105k for Nuvos members, or over £80k for Classic, Classic Plus and Premium members, but this will also depend on how much reckonable service is accrued.
- Lower salary levels where there is a significant pay increase.
- Ill health retirement with enhanced service (serious ill health commutation is not affected).
- Using compensation lump sum to buy added pension.
- Buying added pension.
- Those with other pension savings.
- Those who link previous service.
- Those who transfer in pension benefits under the Public Sector Transfer Club arrangement.
Tax is the member's responsibility and this tax charge is administered through Self-Assessment with HM Revenue & Customs. HMRC provide comprehensive Self Assessment - external link - guidance on their website.
The real growth of the pension over the year is known as the 'Pension Input Amount'.
Calculating the Annual Allowance input amount
The pension input period normally runs for a year, for example for the Research Councils' Pension Scheme this was from 1 January to 31 December. For the 2015-16 tax year there will be two input periods; 1 January 2015 to 8 July 2015 (pre-alignment) and then 9 July 2015 to 5 April 2016 (post-alignment). Thereafter the pension input period will be aligned to the tax year 6 April to 5 April. Further information is included in the Changes to the Annual Allowance 2016 (PDF, 111KB) - opens in new window - document.
To calculate the Pension Input Amount for the Pension Input Period (PIP), the following elements are used:
- Value of the benefits as at the start of the PIP, increased in line with CPI for inflation
- Value of the benefits as at the end of the PIP
- Contributions to a defined contribution pension; eg Partnership or AVCs to Scottish Widows or Standard Life
The Pension Input Amount is (B) + (C) - (A). As pensions are in pay for the members' lifetime the increase in the annual pension is multiplied by a factor of 16 to provide the real growth in the pension saving.
The Partnership scheme is defined contribution, also known as 'money purchase'. The amount of Annual Allowance used is simply the total amount of contributions during the Pension Input Period.
Example of Annual Allowance - Classic, no promotion
|Years of service||Pensionable Pay||Pension||Lump Sum|
|At start of year||10||£70,000||£8,750||£26,250|
|+ CPI at 2.7%||£8,986||£26,958|
|At the end of year||11||£71,000||£9,673||£29,288|
|Increase in year||1||£1,000||£687||£2,330|
The Pension Input Amount is (16 x 687) + 2,330 = £13,332. The growth of the pension is within the Annual Allowance limit.
Example of Annual Allowance - Premium, with promotion
|Years of service||Pensionable Pay||Pension|
|At start of year||10||£70,000||£11,667|
|+ CPI at 2.7%||£11,982|
|At the end of year||11||£82,500||£15,125|
|Increase in year||1||£12,500||£3,143|
The Pension Input Amount is (16 x 3,143) = £50,288. The growth of the pension is over the 2014-15 Annual Allowance limit by £10,288.
Members can carry forward any unused Annual Allowance automatically from the previous three tax years. There is no need to make any claim to HMRC to carry forward unused Annual Allowance and it does not need to be shown on your tax return if using the unused Annual Allowance means the limit is not exceeded.
Pension Saving Statements
Pension schemes have a statutory obligation to provide a Pension Savings Statement by 6 October each year to anyone who has exceeded the Annual Allowance limit in the previous Pension Input Period. Schemes also have an obligation to provide a statement on request at any other time. To request one please contact us.
It is the member's responsibility to inform HMRC when they exceed the limit, which is done through Income Tax Self Assessment. If the member has a tax charge, the excess, after offsetting unusued allowance, is added to their taxable income and reported to HMRC.
If the tax charge exceeds £2,000, members may be able to pay the charge via Scheme Pays, otherwise they will need to pay the Annual Allowance directly to HMRC through Self Assessment. Under the Scheme Pays facility, JSS can pay the tax charge by permanently reducing the pension scheme benefits.
The Lifetime Allowance (LTA) is the maximum overall value of pension benefits (excluding state pensions) that an individual can build up over their lifetime before a tax charge is paid. The standard LTA was reduced to:.
- £1.25 million on 6th April 2014
- £1 million on 6th April 2016
The LTA is tested when you crystallise your pension benefits; in other words when you access your pension upon retiring. It is calculated by multiplying the value of your pension by 20 and then adding any lump sum which is an automatic entitlement.
When you access your RCPS pension, JSS will inform you if you have exceeded the LTA limit; we will need to know if you have any other pensions because the LTA is applied across all your pension benefits.
From 2016 Annual Benefit Statements include a statement regarding LTA for members who JSS believe are nearing their allowance limit. Not all members will have this information included in their benefit statement so you should be aware that the LTA is applied across the RCPS as well as all of your other pension benefits, JSS may not be aware of other pensions you may have
There is potential for some people that access their pension benefits to be liable for a tax charge as a result of exceeding the LTA. It is likely these will be people that have a Premium or Nuvos pension of £62,500 or more or a Classic pension of £54,350 or more.
Lifetime Allowance Protection
Individuals may be able to apply for LTA 'individual protection'.
More information regarding this can be found online through the HMRC website - external link.
It is important to provide your pension administrators, including JSS, with any LTA protection certificates you hold.
As with any pension or tax related matter, you may wish to seek advice from an independant financial adviser who can consult on your specific circumstances. JSS are unable to provide any financial or tax related advice.
© JSS 2018
Last updated: 16 Aug 2016