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Pension annual allowance
Saving for retirement can be stressful, but pensions can be exciting and offer many benefits, and your pension allowances is just one aspect to consider when building your pension pot.
The pension annual allowance is a maximum pension contribution limit on how much you can save into your pension pot in a tax year (6 April to 5 April). For most people in the UK, this allowance is currently set at £60,000, but it can vary based on your income and specific circumstances, such as being a high earner or if you have accessed your pension. Exceeding the limit can trigger income tax costs, known as the annual allowance charge.
Important - Investment involves risk. The value of investments can fall as well as rise. You may get back less than you originally invested. Bear in mind that tax rules can change and their impact on you will depend on your circumstances.
The pension annual allowance typically includes the total contributions from the following:
Employee Contributions: Any contributions you make from your salary.
Employer Contributions: Contributions made by your employer
Third-Party Contributions: Any contributions made by others, such as friends or family, to your pension.
You won't receive any tax relief on the excess contributions if you go over your annual pension allowance. This means that the amount you over-contribute will not benefit from the usual tax advantages associated with pension contributions. Additionally, you may face a tax bill on the excess contributions for that year, which is known as the annual allowance charge.
If the annual allowance in a particular tax year isn't fully used, it's not necessarily lost. That unused allowance can be carried forward to a later tax year. This may make it possible to pay more than the current year's allowance without incurring an annual allowance tax charge. So, someone who didn't have the available funds or the earnings in earlier years can carry forward the unused amount to a year when their circumstances are different.
You can carry forward unused allowance from up to three tax years. The brought forward allowance can cover (or reduce) the excess in the current year and mitigate the pension savings tax charges. There are specific conditions around carry forward that your adviser will need to ensure you meet. The standard annual allowance for 2023/24 is £60,000. For the tax years 2020/21 to 2022/23 inclusive the standard annual allowance was £40,000.
For personal pension contributions and third party contributions, there is another limit to consider. These contributions are limited by your earnings, as well as the pension annual allowance. Personal contributions matched by earnings benefit from basic rate tax relief.
If you are a higher rate or additional rate taxpayer you are able to claim additional tax relief by filing a tax return or by application to HMRC.
The net relevant earnings limit does not impact pension contributions paid by your employer/company which are limited by just the available annual allowance.
There are some circumstances where your pension annual allowance is reduced from the standard amount, please see below:-
For high earners the standard annual allowance can be reduced. This means looking at two income figures. Firstly, your threshold income (taxable income reduced by any personal pension contributions paid) if this is over £200,000 then a review of your adjusted income (which is your taxable income plus any employer pension contributions) is needed. If this is over £260,000, you will have a tapered pension allowance. For every £2 of income over the £260,000 adjusted income limit this will mean a reduction of £1 to your annual allowance. The maximum amount by which the standard £60,000 annual allowance can be tapered is £50,000 to £10,000.
If you are using carry forward and you are a high earner, you would need to consider these limits for all years in question. The limits above for this tax year, earlier years can have different threshold and adjusted income limits.
When you start flexibly accessing income from your pension pot(s), this will trigger the Money Purchase Annual Allowance (MPAA) rules and your annual allowance limit may be reduced. The MPAA limit is £10,000 in the 2023/24 tax year, which has increased from £4,000 for earlier years. Triggering the MPAA also removes the ability to use carry forward pension allowance.
The lifetime allowance (LTA) has limited the amount of pension benefits which could be taken without triggering an extra tax charge.
From the 2023/24 tax year the limit remains at £1,073,100 but the charge has been reduced to 0%, so effectively no tax will be payable, even if your lifetime pension pot exceeds the lifetime allowance.
From 6 April 2024 the lifetime allowance limit will be removed, and replaced by new limits.
This is the overall limit for taking tax free lump sums from your pension.
Sums taken from your pension that exceed this will be subject to income tax at your marginal rates of income tax.
This will limit the amount of tax free lump sums available, both during lifetime and on death and will match the current LTA. Sums paid above this level will be taxed at your own or the beneficiaries' marginal rate of income tax.
You may have an entitlement to a higher level of tax free lump sum by having pension protections in place and these will remain
This article does not cover pension protection in detail, but if this is something you would like to discuss further, please contact your financial adviser.
Important -This article does not consider Defined Benefit (DB) or Final Salary Schemes, as the rules are complex. If you have a DB or final salary scheme, please refer to your financial adviser for additional information if you wish to make additional pension contributions.
At Ascot Lloyd, our expert, independent financial advisers offer comprehensive pension advice as part of our financial planning service designed to help you achieve your short and long-term goals. Your adviser can help you navigate complex pension matters while also providing expertise in mortgages, investments, protection, and more. As we are independent, our only incentive is your financial well-being. Non-independent advisers are often financially incentivised to recommend particular products.
We are here to help manage your pensions and all financial matters. Get in touch to learn how Ascot Lloyd can help you and start developing your financial plan today.
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