Tax controls on pensions
Annual Allowance (AA)
Lifetime Allowance (LTA)
A guide for members of the Local Government Pension Scheme (LGPS)
Tax controls & your pension
There are controls on the total amount of contributions you can make into all pension arrangements and receive tax relief on, and on the pension savings you can have before you become subject to a tax charge. This is in addition to any income tax you pay on your pension once it is in payment.
Most people will be able to save as much as they wish as their pension savings will be less than the allowances.
Are there any limits on how much I can pay in contributions?
At the present time there is no overall limit on the amount of contributions you can pay, although there is a limit on the extra LGPS pension you can buy when you apply to pay Additional Pension Contributions (APCs). Although there is no overall limit on the amount of contributions you can pay to all schemes, tax relief will only be given on contributions up to a total of 100% of your taxable earnings in a tax year (or, if greater, £3,600 to a 'tax relief at source' arrangement, such as a personal pension or stakeholder pension scheme).
If you have an in-house Additional Voluntary Contributions (AVCs) contract which started before 1 April 2014, you are limited to paying 50% of your pay each pay period into your AVC. That limit does not apply if you have an Additional Voluntary Contributions (AVCs) contract which started on or after 1 April 2014. See our factsheet on Increasing Your Future Pension Benefits for more information.
What are the tax controls on my pension savings?
HM Revenue and Customs impose 2 controls on the amount of pension savings you can make without having to pay extra tax. These controls are known as the Annual Allowance and Lifetime Allowance. This is in addition to any income tax you pay on your pension once it is in payment.
Annual Allowance (AA)
What is the Annual Allowance?
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.
Therefore, if the value of your pension savings in any one year, including pension savings outside of the LGPS, are in excess of the annual allowance, the excess will be taxed as income. The Government reduced the AA from £255,000 to £50,000 from 6 April 2011 and then reduced it again to £40,000 from 6 April 2014. Further changes to the annual allowance have been made for higher earners from 6 April 2016, which resulted in special transitional rules for the 2015/16 tax year.
Annual allowance rates since 2011
| Pension Input Period (PIP) | Annual Allowance (AA) |
|---|---|
| 1 April 2011 to 31 March 2012 | £50,000 |
| 1 April 2012 to 31 March 2013 | £50,000 |
| 1 April 2013 to 31 March 2014 | £50,000 |
| 1 April 2014 to 31 March 2015 | £40,000 |
| 1 April 2015 to 5 April 2016 | £80,000 (transitional rules apply) |
| 6 April 2016 to 5 April 2017 onwards | £40,000 (unless tapering applies) |
| Definition | Limits for 2016/17 to 2019/21 | Limits in 2020/21 | |
|---|---|---|---|
| Threshold Income | Broadly your taxable income after the deduction of your pension contributions (including AVCs deducted under the net pay arrangement) | £110,000 | £200,000 |
| Adjusted Income | Broadly your threshold income plus pensions savings built up over the tax year | £150,000 | £240,000 |
| Minimum AA | If your AA is tapered, the minimum AA that can apply | £10,000 | £4,000 |
Threshold income includes all sources of income that are taxable e.g. property income, savings income, dividend income, pension income, social security income (where taxable), state pension income etc.
Please note, you are not allowed to deduct from taxable income any amount of employment income given up for pension provision as a result of any salary sacrifice made on or after 9 July 2015.
How does the taper work?
The taper reduces the AA by £1 for £2 of adjusted income received over £240,000, until a minimum AA of £4,000 is reached. This means that from 6 April 2020 the AA for high earners is as follows:
| Adjusted Income | Annual Allowance |
|---|---|
| £240,000 or below | £40,000 |
| £250,000 | £35,000 |
| £260,000 | £30,000 |
| £270,000 | £25,000 |
| £280,000 | £20,000 |
| £290,000 | £15,000 |
| £300,000 | £10,000 |
| £312,000 or above | £4,000 |
Here are some examples of how the Taper is calculated – but please note, the examples make no allowance for any carry forward and assume an inflation adjustment of zero. The pension savings in the year are based on the assumption that the members have no final salary benefits in the LGPS and that they are not paying any additional contributions
Example 1 – Sanjay
| Gross salary 2019/20 | £130,000 |
| Less employee pension contributions (11.4%) | £14,820 |
| Plus taxable income from property | £30,000 |
| Threshold income 2019/20 | £145,180 |
| Plus pension savings in the year | £42,449 |
| Adjusted income 2019/20 | £187,629 |
Sanjay’s Threshold Income is more than £110,000 and his Adjusted Income is more than £150,000. His AA is tapered for the 2019/20 year.
| Tapered AA | £21,186* |
| In excess of AA | £21,263 (£42,449 - £21,186) |
| AA tax charge at marginal rate | £8,505.20 (marginal rate of 40% assumed) |
* Taper = £187,629 - £150,000 = £37,629 ÷ 2 = £18,814 (rounded down)
Standard AA £40,000 - £18,814 = tapered AA £21,186
Example 2 – Cerys
| Gross salary 2020/21 | £220,000 |
| Less employee pension contributions (12.5%) | £27,500 |
| Threshold income 2020/21 | £192,500 |
| Pension savings in the year | £71,837 |
Cerys’s Threshold Income is less than £200,000. Her AA will not be tapered in 2020/21. Cerys’s pension savings will be measured against the standard AA of £40,000.
| Standard AA | £40,000 |
| Pension savings in excess of AA | £31,837 |
| AA tax charge at marginal rate | £14,327 (marginal rate of 45% assumed) |
Example 3 – Huang
| Gross salary 2020/21 | £210,000 |
| Less employee pension contributions (12.5%) | £26,250 |
| Plus taxable income from property | £30,000 |
| Threshold income 2020/21 | £213,750 |
| Plus pension saving in the year | £68,571 |
| Adjusted income 2020/21 | £282,321 |
Huang’s Threshold Income is more than £200,000 and her Adjusted Income is more than £240,000. Her AA will be tapered for the 2020/21 year.
| Tapered AA | £18,840* |
| In excess of AA | £49,731 |
| AA tax charge at marginal rate | £22,379 (marginal rate of 45% assumed) |
* Taper = £282,321 - £240,000 = £42,321 ÷ 2 = £21,160 (rounded down)
Standard AA £40,000 - £21,160 = £18,840
(b) Aligning the ‘Pension Input Period’ (PIP) with the tax year
The ‘pension input period’ (PIP) is the period over which your pension growth is measured. Up until 2014/15, the PIP in the LGPS ran from 1 April to 31 March. From 6 April 2016, PIPs for all pension schemes are aligned with the tax year – 6 April to 5 April. Special transitional arrangements apply for 2015/16 meaning that there were 2 PIPs in 2015/16, as set out below:
Pre-alignment tax year: 1 April 2015 to 8 July 2015 - the revised AA during this period was £80,000
Post-alignment tax year: 9 July 2015 to 5 April 2016 - the AA for this period is the amount of the £80,000 not used up from the pre-alignment tax year (subject to a maximum of £40,000) together with any carry forward available from the three previous years.
If you have flexibly accessed any benefits in a money purchase pension arrangement on or after 6 April 2015 (see below) you should contact Equiniti for information about how the pre and post alignment tax years will work as it will be different from the above.
Annual Allowance ‘Flexible Benefit’ access
If you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015, then the Money Purchase Annual Allowance (MPAA) rules may apply. However, the MPAA will only apply if your total contributions to a money purchase arrangement in a Pension Input Period exceed the MPAA.
Generally, if you have flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, any further contributions you make to a money purchase scheme in subsequent tax years will be tested against the MPAA. If your contributions exceed the MPAA your defined benefit pension (LGPS) savings will be tested against the alternative AA and you will pay a tax charge in respect of your money purchase saving in excess of the MPAA.
Money Purchase Annual Allowance (MPAA)
| Tax Year | MPAA | Alternative Annual Allowance If MPAA is exceede |
|---|---|---|
| 2016/17 | £10,000 | £30,000 |
| 2017/18 onwards | £4,000 | £36,000 |
Special transitional rules applied for the tax year 2015/16 – contact Equiniti for more information, if applicable. If you access flexible benefits you will be provided with a flexible access statement; and you should provide your LGPS pension fund with a copy of this statement.
Flexible access means taking a cash amount over the tax-free lump sum from a flexiaccess drawdown account, taking an uncrystallised funds pension lump sum (UFPLS), purchasing a flexible annuity, taking a scheme pension from a defined contribution scheme with fewer than 12 pensioner members or taking a stand-alone lump sum if you have primary but not enhanced protection.
How would I pay an Annual Allowance tax charge?
If you exceed the AA in any year, you are responsible for reporting this to HMRC on your self-assessment tax return.
The Hackney pension fund is only obliged to notify you if your Hackney LGPS benefits (plus the amount of any in-house additional contribution contracts and in-house Additional Voluntary Contributions (AVCs) you may have paid) exceed the standard AA.
The scheme administrator must inform you by no later than 6 October of the following tax year. However, your pension fund is not obliged to inform you if you exceed the tapered annual allowance.
If you have an AA tax charge that is more than £2,000 and your pension savings in the LGPS alone have increased in the year by more than the standard AA, you may be able to opt for the Scheme to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits; this is called Scheme Pays.
If you want the Scheme to pay some or all of an AA tax charge on your behalf, you must notify your pension fund no later than 1 December in the year following the end of the year to which the AA charge relates, and notify HMRC of your decision on your self-assessment tax return. However, if you are retiring (and draw all of your benefits from the LGPS) and you want the LGPS to pay some or all of the tax charge on your behalf from your benefits, you must tell your pension fund before you become entitled to those benefits. See our policy on Voluntary Scheme Pays for more details
Your pension fund, at their discretion, may also agree to pay some or all of an annual allowance charge on your behalf in other circumstances e.g. where your pension savings are not in excess of the standard AA but are in excess of the tapered or money purchase AA, or where part of the charge relates to pension savings outside of the LGPS – our Voluntary Scheme Pays policy has full details
I am affected, where can I get more information on AA?
If you think you are affected by the AA, more information is available on the Government’s website - https://www.gov.uk/tax-on-your-private-pension/annualallowance.
If you are unsure if you will be affected by the AA, use the AA quick check tool on the national LGPS member website - https://www.lgpsmember.org/more/aa-quick-checktool.php
2. Life Time Allowance (LTA)
What is the lifetime allowance?
The lifetime allowance is the total value of all pension benefits you can have without triggering an excess benefits tax charge. If the value of your pension benefits when you draw them (not including any state retirement pension, state pension credit or any partner's or dependant's pension you are entitled to) is more than the lifetime allowance, or more than any protections you may have, you will have to pay tax on the excess benefits.
The lifetime allowance covers any pension benefits you have in all tax-registered pension arrangements - not just the Local Government Pension Scheme (LGPS).
The lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and again in 2016. Each time the lifetime allowance reduced, if you had already planned your pension savings on the basis of the higher lifetime allowance, you were able to protect your pension savings by applying to HMRC for a lifetime allowance protection. These protections are covered in more detail later in this factsheet.
The lifetime allowance steadily reduced from 2012/13 to 2017/18. From 2018/19 onwards the lifetime allowance increases each year in line with inflation, see below:
| Tax Year | Lifetime Allowance (LTA) |
|---|---|
| 2011/12 | £1.8 million |
| 2012/13 | £1.5 million |
| 2013/14 | £1.5 million |
| 2014/15 | £1.25 million |
| 2015/16 | £1.25 million |
| 2016/17 | £1.00 million |
| 2017/18 | £1.00 million |
| 2018/19 | £1.03 million |
| 2019/20 | £1,055,000 |
| 2020/21 | £1,073,100 |
How is the lifetime allowance calculated?
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your annual pension by 20 then adding any lump sum you take from the pension scheme and any AVC plan you may have.
Each time you take payment of a pension benefit the capital value of the benefits you are taking is expressed as a percentage of the lifetime allowance limit that applies on that date and is deducted from your available lifetime allowance. So even if your pensions are small and individually will not be more than the lifetime allowance, you should keep a record of any pensions you receive.
The Lifetime Allowance is calculated and measured at the point of retirement which is called a ‘Benefits Crystallisation Event’ – BCE – and any excess above the available lifetime allowance is taxable.
When you take your LGPS benefits, if the capital value of those benefits is more than your available lifetime allowance you will have to pay tax on the excess. If your excess benefits are paid as a pension the tax charge will be 25% of the capital value of the excess; the ongoing pension payments will also be subject to income tax. If the excess benefits are taken as a lump sum they will be taxed once only at 55%.
If you have a pension that came into payment before 6 April 2006, this will also be treated as having used up part of your lifetime allowance. For these pensions, the capital value is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
You can choose to pay the tax charge immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself, or you can ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
Examples:-
Sarah retired on 31 May 2020
| LGPS annual pension | £25,000 |
| LGPS lump sum | £45,000 |
| AVC taken as lump sum | £116,375 |
| Capital Value of benefits ((£25,000 x 20) + £45,000 + £116,375) | £661,375 |
Sarah has not drawn any pension benefits previously; the capital value of her benefits is less than the LTA for 2019/20 of £1,073,100.
She has used 61.63% of the available LTA.
Patrick retired on 15 July 2020
| LGPS annual pension | £50,000 |
| LGPS lump sum | £120,000 |
| Capital Value of benefits (£50,000 x 20 + £120,000) | £1,120,000 |
| Excess over the LTA (£1,120,000 – £1,073,100) | £46,900 |
| Excess annual pension over LTA (£46,900 / 20) | £2,345 |
| Excess annual pension taken as additional lump sum on a 12:1 conversion (£2,345 x 12) | £28,140 |
| Tax Charge on benefits in excess of £1,073,100 (£28,140 x 55% (tax is charged at 55%)) | £15,477 |
| Actual Benefits Payable | |
| Annual Pension (£50,000 - £2,345) | £47,655 |
| Lump sum (£120,000 + £28,140 - £15,477) | £132,663 |
Patrick has not taken payment of any pension benefits previously; he has not applied for any lifetime allowance protection and has opted to be paid the benefits in excess of the LTA as a lump sum.
He has used 100% of the available LTA.
Changes to the lifetime allowance
The lifetime allowance was reduced from £1.25 million to £1 million with effect from 6 April 2016. At that time 2 new protections were introduced called Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced from £1.5 million to £1.25 million in 2014.
Individual Protection 2016 (IP2016)
You can apply for IP2016 from 6 April 2016 if your pension savings were valued at over £1 million (including pensions already in payment) on 5 April 2016. However, if you have primary protection, you can’t apply for IP2016.
IP2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016 - up to an overall maximum of £1.25 million. You will not lose IP2016 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.
Fixed Protection 2016 (FP2016)
You can apply for FP2016 from 6 April 2016 if you expect your pension savings to be more than £1 million (including pensions already in payment) when you come to take them on or after 6 April 2016. FP2016 can be used to help reduce or mitigate the lifetime allowance charge.
However, because FP2016 is lost if your benefits increase by more than the cost of living increase in any one tax year, if you apply for and wish to keep FP2016 you must have opted out of the LGPS with effect from 6 April 2016 - because the cost of living increase in 2016/17 was zero and thus any increase in your benefits on and after 6 April 2016 will result in the loss of FP2016.
You can't have FP2016 if you already have primary, enhanced, fixed protection 2012 or fixed protection 2014. With FP2016 your lifetime allowance is fixed at £1.25 million rather than the standard lifetime allowance.
The maximum tax free lump sum you can take on retirement is the lesser of:
- 25% of the capital value of your LGPS benefits, or
- 25% of the lifetime allowance which, for those with FP2016, is £312,500 (i.e. 25% of your lifetime allowance of £1.25million), or
- 25% of your remaining lifetime allowance if you have previously taken payment of (crystallised) pension benefits as you will have already used up some of your lifetime allowance.
FP2016 will also be lost if you start a new pension arrangement, other than to accept a transfer of existing pension rights, or if you pay contributions into a money purchase pension arrangement, other than to a life assurance policy providing death benefits that started before 6 April 2006. You will also be subject to restrictions on where and how you can transfer benefits.
If you lose FP2016 you must electronically notify HMRC within 90 days of the day on which you could first reasonably be expected to have known that an event had occurred causing you to have lost this protection. Failure to do so could result in a fine of £300 and a penalty of up to £60 per day after the initial fine has been issued until you supply them with the required notification.
Applying for Fixed and Individual Protection 2016
HMRC has introduced an on-line self-service for pension scheme members to apply for IP2016 or FP2016 at:- https://www.gov.uk/guidance/pension-schemes-protectyour-lifetime-allowance.
There is no application deadline for IP2016 or FP2016, although to apply for IP2016 you will need to inform HMRC of the value of your pension savings on 5 April 2016 and your pension administrator is only obliged to provide you with this information up to 5 April 2020.
However, you must apply before you take your retirement benefits as you will need to provide the HMRC reference number to your pension fund administrator if you want to rely on the protection. Once you have successfully applied for protection the online service will provide you with a reference number which you will need to keep.
Your pension savings may already be protected
As mentioned, the lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and again more recently in 2016. Each time the lifetime allowance reduced, if you had already planned your pension savings on the basis of the higher lifetime allowance, you could protect your pension savings by applying to HMRC. If you have applied for a previous protection i.e. enhanced protection, primary protection, fixed protection 2012, individual protection 2014 or fixed protection 2014 you should have received a certificate to confirm your protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can find more information about tax on your private pension contributions, these protections and when they may be lost at: - https://www.gov.uk/tax-on-your-privatepension/lifetime-allowance
I think I might be affected – what should I do?
Before considering any action to reduce your tax liabilities you should always seek independent financial advice from an FCA registered adviser. For help in choosing an independent financial adviser visit the money advice website:- https://www.moneyadviceservice.org.uk/en/articles/choosing-a-financial-adviser
There are certain considerations that you may wish to take into account:
- Converting annual pension for lump sum at retirement can reduce the capital value of your pension benefits
- If you wish to slow down your pension build up the 50/50 section of the LGPS allows you to pay half your normal contributions and build up half your normal pension whilst still retaining full life and ill health cover
- If you opt out of the LGPS with the right to a deferred benefit you will not be able to aggregate your benefits should you re-join the LGPS at a later date
FURTHER INFORMATION
London Borough of Hackney Pension Fund team:
Email:
Address:
Pension Administration
London Borough of Hackney Pension Fund
Financial Services
4th Floor, Hackney Service Centre
1 Hillman Street
London E8 1DY
Telephone:
020 8356 2521
Pension Administrators – Equiniti
Website:
www.hackneypension.co.uk
Address:
London Borough of Hackney Pension Fund
Equiniti
Russell Way
Crawley
West Sussex
RH10 1UH
Telephone:
01293 603085
Disclaimer
This booklet is for general use and cannot cover every personal circumstance, nor does it cover specific protected rights that apply to a very limited number of members. In the event of any dispute over your pension benefits, the appropriate legislation will prevail as this booklet does not confer any contractual or statutory rights, and is provided for information purposes only.
NOTE - This factsheet provides an overview of the AA & LTA rules at April 2020. It should not be treated as a complete and authoritative statement of the law. The rules governing AA can be complex and are subject to change; if you are unsure how to proceed you are advised to obtain independent financial advice.