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. 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 (AA)

The Annual Allowance (AA) is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. This is in addition to any income tax you pay on your pension once it is in payment.

If the value of all your pension savings in any one year (including pension savings outside of the PPS) are greater than the AA, the excess will be taxed as income.

The AA was set at £40,000 from 6 April 2014 and increased to £60,000 from 6 April 2023.

Most people will not be affected by the AA tax charge because the value of their pension saving will not increase in a year by more than £40,000, or, if it does they are likely to have unused allowance from previous years that can be carried forward.

Money Purchase Annual Allowance (MPAA)

You may also have benefits in different types of schemes, known as money purchase or defined contribution schemes (e.g. private pensions).

If you have:

  • flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, and
  • paid contributions to a money purchase scheme that exceed the MPAA (below),

then your defined benefit pension savings (e.g. your Police pension) will be tested against the alternative AA limit and you will pay a tax charge in respect of your money purchase savings in excess of the MPAA.

Tax year MPAA Alternative AA if MPAA is exceeded
2021 to 2022 £4,000 £36,000
2022 to 2023 £4,000 £36,000
2023 to 2024 £10,000 £50,000

If you access flexible benefits you will be provided with a flexible access statement. Make sure that you provide us with a copy of this statement.

Lifetime Allowance (LTA)

The spring budget 2023 stated that no one will face a LTA charge from April 2023.

The LTA framework remains in place but the government are intending to remove this in  future Finance Bill.

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 Chancellor of the Exchequer announced in the 2021 Budget that the lifetime allowance would remain at its current level of £1,073,100 until April 2026. If you take more than £1,073,100 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
  • 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 LGPS benefits for the LTA?

HMRC value your pension pot for the Lifetime Allowance (LTA) as 20 times your annual pension plus any lump sum.

If you pay into an AVC, the current value of the AVC fund will need to be added to the total pension pot.

You can therefore work out the current value of your LGPS pension for lifetime allowance purposes by taking the annual pension amount shown on page 2 of your latest annual benefit statement and multiplying it by 20 and adding on any amount shown in the automatic lump sum box.

This will only give you the value of your current LGPS benefits in the Hampshire Fund. If you have any other pensions you will need to take these into account. Contact your pension administrator for the current value of any other pensions which you have.

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?

You can now apply to HMRC for one of two LTA protections. These will be known as fixed protection 2016 and individual protection 2016.

You can apply for these protections by using the government self-service system which was introduced in July 2016.

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 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.

Useful information