Pensions and tax
HM Revenue and Customs (HMRC) governs pensions savings. There are two main allowances for pension savings, an annual allowance and lifetime allowance (LTA). 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 Pensions Services staff cannot provide this for you.
- Annual allowance
The annual allowance is set by HMRC and limits how much your pension savings can increase in a year before you have to pay tax on them.
From 6 April 2016, the pension input period must be aligned to the tax year, instead of the scheme year of the LGPS which ends each 31st March. Increases in pension benefits are called 'deemed contributions'.
Following the Government's announcements during the 2015 summer budget, there are changes for annual allowance from 6 April 2016. For more information on the current annual allowance, annual allowance taper for higher earners and available protections, refer to the HMRC website.
- Lifetime Allowance (LTA)
If your pension savings are worth more than £1 million you may need to protect your pension savings from the lifetime allowance tax charge.
What is the lifetime allowance?
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance is currently £1.25 million but is reducing to £1 million from 6 April 2016.
From 6 April 2016 if you take more than £1 million from your combined pension savings, you may face a tax charge.
- How much is the lifetime allowance tax charge?
The lifetime allowance tax charge is:
- 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance and
- 25% of any amount you take from your pension savings as pension income that is over the lifetime allowance
- Do you know the value of your combined pension funds?
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. Your pension scheme administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not, you should contact your pension scheme administrator(s) for more information.
This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.
- How do I work out the HMRC value of my pension scheme benefits for the LTA?
HMRC value your pension pot for the lifetime allowance (LTA) as 20 times your annual pension plus any lump sum to which you are automatically entitled (i.e. not any lump sum you choose to take by giving up pension).
If you pay into an AVC, the current value of the AVC fund will need to be added to the total pension pot.
- Do I need to do anything now?
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection, but know that you may lose this, you may also need to consider whether to apply for the new protections.
- What do I need to do to protect my pension savings?
From April 2016 you will be able to apply to HMRC for one of two new protections when the lifetime allowance is reduced. These will be known as fixed protection 2016 and individual protection 2016.
You will be able to apply for these protections by using an online self-service system. The new self-service system is still being developed and we will provide you with more information in due course.
You can find more information about the reduction of the lifetime allowance in Pension Schemes Newsletters 72 and 73.
- Pension schemes newsletter 72 – September 2015 – GOV.UK
- Pension schemes newsletter 73 – October 2015 – GOV.UK
Your pension savings may already be protected
The lifetime allowance was introduced in 2006 and was reduced in 2012 and again in 2014.
Each time the lifetime allowance is reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a certificate to confirm their protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can still apply for protection from the 2014 reduction in lifetime allowance until 5 April 2017. You can find more information about how to do this along with other information about the existing protections and when these may be lost at: Tax on your private pension contributions – GOV.UK.
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