There are HM Revenue and Customs (HMRC) rules that govern pension savings. These are controls on the total 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 on top of any income tax you pay on your pension once it is in payment. There are two controls; the annual allowance and the lifetime allowance.
For more information on the annual allowance and lifetime allowance visit the HMRC web site. You can also refer to the annual and lifetime allowance factsheets below.
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 tax charge is in addition to any income tax you pay on your pension once it is in payment.
If the value of your pension savings in any one year (including pension savings outside of the LGPS) are more than the annual allowance, the excess is 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 resulted in special transitional rules for the 2015/16 tax year. See the AA factsheet for more information.
Will the Annual Allowance tax charge affect me?
The current annual allowance for 2021/22 is set at £40,000. The AA tax charge won't affect most people because the value of their pension saving will not increase by more than £40,000 in a year. Even if it does, they are likely to have unused allowance from previous years that can be carried forward. We will inform you, by 6 October, if your LGPS pension savings exceed the standard AA in any year.
If the total of an individual’s pension input amount, in respect of all their arrangements within our pension fund exceeds the AA, we provide a pension savings statement to the affected member by 6 October. This relates to what we hold in our pension fund and should include Additional Voluntary Contributions (AVCs).
The pension savings statement shows:
The total of the member’s pension input amount in respect of all their arrangements in our pension fund. This is for the relevant pension input period and for the previous three pension input periods.
The annual allowance for the tax year in which the relevant pension input period ends and for the previous three pension input periods.
Where the total of an individual’s pension input amount in respect of all their arrangements in our pension fund does not exceed the AA, the member will not receive a pension savings statement. But they can make a written request for one. We will then provide a pension savings statement showing the information detailed above.
Please note: The statement will be provided by the later of, three months following receipt of the request, or six months from the end of the tax year i.e. 6 October.
What is the Lifetime Allowance?
The lifetime allowance (LTA) 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 is more than the LTA, or more than any protections you may have, you will have to pay tax on the excess benefits. This value does not include any state retirement pension, pension credit or any partner's or dependant's pension you may be entitled to.
The LTA covers any pension benefits you may have in all tax-registered pension arrangements. It is not limited to the Local Government Pension Scheme (LGPS). The LTA was introduced in 2006 and was reduced in 2012, 2014 and again in 2016. Each time the LTA reduced, you were able to protect your pension savings by applying to HMRC for a LTA protection. See the LTA factsheet for more information on these protections.
The LTA is currently set at £1,073,100. The government has announced the LTA will be frozen at this rate for the next five years.
LGPS Annual Allowance - Annual allowance factsheet
LGPS Lifetime Allowance - Lifetime allowance factsheet
LGPS Scheme Pays Q and A - Scheme Pays factsheet