Annual Allowance
The Annual Allowance is the maximum amount of pension savings that can benefit from tax relief each year (April to March). The standard Annual Allowance is currently £60,000 per tax year (2024/2025). If you build pension savings over this you may incur a tax charge.
For defined contribution arrangements such as the NRDC, this is measured quite simply as the amount of employee and employer contributions, as well as any Additional Voluntary Contributions (AVCs) paid in during the year.
For defined benefit arrangements such as the RPS and CARE, this is measured based on the value of the benefits you’ve earned over the year (not just based on contributions paid in).
If you have exceeded the Annual Allowance, you may be able to carry forward any unused Annual Allowance from the previous three years to reduce or eliminate any potential tax charge.
If you’re a high earner (with a threshold income over £200,000 and an ‘adjusted income’ over £260,000 , applicable from 6th April 2023), you’re likely to have a Tapered Annual Allowance. This means your standard Annual Allowance is reduced by £1 (to a minimum Annual Allowance of £10,000) for every £2 your ‘adjusted income’ is over £260,000.
If you’ve started taking any BRASS, CARE AVC or NRDC savings (or any other defined contribution savings) you’re likely to have a Money Purchase Annual Allowance (MPAA).
The MPAA was introduced to stop defined contribution savings being taken out and then repaid into another pension scheme for extra tax relief. The MPAA essentially limits how much you can pay into a defined contribution arrangement before you need to pay tax. The limit is currently £10,000 per year.
If you and your employer make contributions that go over the limit, you’ll need to pay additional income tax on the amount you’ve gone over by. This cancels out the tax relief which you’d received automatically.
If you’re over the MPAA you’ll need to contact HMRC.
If you have exceeded the Annual Allowance, Tapered Annual Allowance or Money Purchase Annual Allowance (MPAA), you will need to let HMRC know on your self-assessment tax return. Further information about paying an Annual Allowance tax charge can be found on the HMRC website.
Alternatively, you may be able to use your pension savings to cover the charge with ‘Scheme Pays’, which is offered by each of the RPS, CARE and NRDC Pension Schemes.
Please contact the relevant Scheme’s administrator for further information on ‘Scheme Pays’.
Lifetime Allowance
As you may be aware, from 6th April 2024 the Lifetime Allowance (LTA) has been abolished.
The LTA was previously a limit set by the Government on the amount of pension that you could accrue across all pension schemes an individual has without facing a tax charge when claiming your pensions.
Although the LTA has been abolished the Government has introduced three new limits which apply to pension scheme members:
Lump Sum Allowance (LSA): The maximum you can take as tax-free cash from all of your pension arrangements is limited to £268,275, unless you hold a valid Lifetime Allowance (LTA) protection. Lump sums paid under this allowance are called Pension Commencement Lump Sums (PCLS).
If your lump sum exceeds the LSA then you would have the following choices:
– Claim the excess above the LSA as lump sum. You would still receive the maximum LSA of £268,275 tax-free but anything above this would be subject to tax at your marginal tax rate. This excess amount is called a Pension Commencement Excess Lump Sum (PCELS).
– RPS Members only – Convert the excess above the LSA to additional annual pension.
Lump Sum and Death Benefit Allowance (LSDA): There is now a maximum limit applied to the maximum tax-free death benefits that can be paid. The limit has been set at £1,073,100, unless you hold a valid LTA protection, and if any death benefits exceed this amount, the excess will be subject to tax at the beneficiaries marginal tax rate.
Overseas Transfer Allowance (OTA): A new limit has been applied to transferring your pension to a ‘Qualifying Recognised Overseas Pensions Scheme’ (QROPS). If you wanted to transfer your pension benefits abroad, if the total value exceeds £1,073,100 then an overseas transfer charge of 25% will apply on the excess.