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.
Annual Allowance is the maximum amount of pension saving 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.
However, for a small number of high earners the £40,000 Annual Allowance has been reduced on a tapered basis, from the 2016-17 tax year. This was where their threshold income, which is broadly net income before tax (excluding pension contributions) exceeded £110,000 pa. This sum has been increased to £200,000 pa from the 2020-21 tax year. If you think that a tapered Annual Allowance may apply to you then further guidance is available on request from firstname.lastname@example.org.
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 (PIP) runs for a year. It was alligned to the tax year 6 April to 5 April for all pension schemes from the 2016 to 2017 tax year. Prior to this the PIP for the Research Councils' Pension Scheme (RCPS) was from 1 January to 31 December.
To calculate the Pension Input Amount for the 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 Pension Account is a defined contribution arrangement, also known as 'money purchase'. The amount of Annual Allowance used is simply the total amount of contributions during the PIP.
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 Annual Allowance limit by £10,288.
Members can automatically carry forward any unused Annual Allowance from the previous three PIP 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 Annual Allowance Calculator
HMRC have made a calculator available to check if you have an annual allowance tax charge on your pension savings. The calculator can be reached via the HMRC website - external link.
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 PIP. 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 Self Assessment. If the member has a tax charge, the excess, after offsetting unused allowance, must be 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 tax charge directly to HMRC through Self Assessment.
Under the Scheme Pays facility, JSS can pay the tax charge by permanently reducing the pension scheme benefits.
More information can be found about paying the tax charge on the HMRC Website - external link.
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 LTA for the year 2021/22 is £1,073,100. The Government normally increases the Lifetime Allowance in line with CPI increases but decided to freeze the LTA at £1,073,100 until April 2026.
The LTA is tested when you crystallise your pension benefits; in other words when you access your pension benefits upon retiring. It is calculated by multiplying the value of your pension by 20 and then adding any lump sum which is paid.
When you access your RCPS pension benefits, 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.
Annual Benefit Statements include a statement regarding LTA for members who, taking into account their RCPS benefits only, are nearing the LTA limit. Not all members will have this information included in their Benefit Statement. Members must be aware that the LTA is applied across all pension savings, JSS will not be aware of other pension savings individuals 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. Based on the 2020/21 LTA, it is likely that these will be people that have a Premium or Nuvos pension of £53,655 or more or a Classic pension of £46,656 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.
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