Do the tax rules on pension savings limit the extra I can pay?
There are HM Revenue and Customs controls on the total amount of contributions you can make into all pension arrangements and receive tax relief.
There are also controls, known as the Lifetime Allowance (LTA) and the Annual Allowance (AA) on all the pension savings you can have before you become subject to a tax charge.
Most scheme members’ pension savings will be less than these allowances.
You can, if you wish, pay up to 100% of your UK taxable earnings in any tax year into any number of concurrent pension arrangements of your choice (or, if greater, £3,600 to a “tax relief at source” arrangement, such as a personal pension or stakeholder pension scheme) and receive tax relief on the contributions.
The LTA is the total capital value of all your pension arrangements which you can build up without paying extra tax. If the value of your benefits when you draw them (not including any state retirement pension, state pension credit or any spouse’s, civil partner’s, eligible cohabiting partner’s or dependant’s pension you may be entitled to) exceeds your LTA a tax charge will be made against the excess. The LTA for 2018/19 is £1.03 million (unless you have a protected higher lifetime allowance).
The AA is the amount your pension savings can increase by in any one year without paying extra tax. Up until 2014/15 the pension saving year in the LGPS ran from 1 April to 31 March.
From 6 April 2016, the pension saving year for all pension schemes was aligned with the tax year – 6 April to 5 April. Special transitional arrangements applied for 2015/16.
The AA for 2018/19 is £40,000 unless you are a high earner who is subject to the tapered AA in which case it may be lower.
You would only be subject to an AA tax charge if the value of your pension savings for a tax year increases by more than the AA. However, a three year carry forward rule normally allows you to carry forward unused AA from the last three tax years. This means that even if the value of your pension savings increase by more than £40,000 in a year you may not be liable to the AA tax charge.
Most people will not be affected by the AA tax charge because the value of their pension saving will not increase in a tax year by more than the AA or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward.
If you have applied for LTA enhanced protection, fixed protection or fixed protection 2014 or fixed protection 2016 from HM Revenue and Customs you will lose that protection if you pay contributions into a money purchase pension arrangement (e.g. pay LGPS in-house AVCs or pay into a stakeholder or personal pension plan). You may not lose this protection if you are paying AVCs at 5 April 2006 purely for extra life cover and the terms of the policy have not varied significantly since then.
You can find out more about HM Revenue and Customs controls on your pension savings from the section on Tax controls and your LGPS Benefits.