Pensions and tax

HM Revenue and Customs (HMRC) governs pensions savings. There are three main allowances for pension savings, an Annual Allowance (AA), a Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). The LSA and LSDBA replace the former Lifetime Allowance with effect from 6 April 2024. The information below provides an overview of the rules governing taxation of pension savings. The rules are complex and can only be summarised here. If you are unsure about the best course of action, it is recommended that you get specialist financial advice and tax guidance as Pension Services staff cannot provide this for you.
Annual allowance

The Annual allowance (AA) is the amount by which the value of your Pension benefits may grow (Pension Savings) in any one tax year without you having to pay a tax charge. The standard AA limit has been set at £40,000 since 2016 and rises to £60,000 from 6 April 2023.

If the total value of your Pension Savings in any one tax year, including all Pension Savings in all pension schemes, is in excess of the AA limit, the excess will be taxed as income at your highest marginal rate of tax.

You are most likely to be affected if you:

  • have a lot of membership or pension built up in the Scheme and you receive a significant pay increase, or promotion, and/or;
  • are a high income earner, and/or
  • pay a high level of additional contributions towards your pension, and/or
  • have accessed flexible benefits from another pension scheme on or after 6 April 2015

Hampshire Pension Services will automatically inform you if your Pension Savings in this scheme exceed the standard AA limit in any tax year by no later than 6 October of the following tax year.

For more information on Annual Allowance, see Annual Allowance factsheet or HMRC guidance on Annual allowance.

Lump Sum Allowance (LSA)
The LSA is a limit on the total amount of tax-free cash an individual can take from all their pension saving . It is set at £268,275 and there is no provision in the legislation for this limit to rise. 
Lump Sum and Death Benefit Allowance (LSDBA)
The LSDBA is a limit on the amount of tax free cash that can be taken by an individual and the lump sum death benefits that can be paid in respect of an individual when they die. It is set at £1,073,100 and there is no provision in this legislation for this limit to rise. 
In general
  • Any payments in excess of the LSA or LSDBA will be taxable at the recipient's marginal rate of tax. 
  • The LSA and LSDBA are reduced when the individual has previously used up some or all of their Lifetime Allowance.