The Government wants to encourage people to save for the future. So it gives you tax relief on the money you save in a pension as long as you don’t exceed:
- The Annual Allowance which allows tax relief on a certain amount of money each year (currently £40,000)
- The Lifetime Allowance which relates to the amount of money across your whole lifetime (currently just over £1 million).
What’s the Annual Allowance?
The Government looks at a period of time called the Pension Input Period, to see how much the value of your benefits (except for funds arising from Additional Voluntary Contributions) have increased (in excess of inflation as measured by the Consumer Prices Index).
If you paid Additional Voluntary Contributions, during the Pension Input Period, these contributions also count towards your Annual Allowance.
If you are thinking about the Annual Allowance, it’s helpful to know about:
Managing peaks: If you exceed the Annual Allowance in any tax year, you don’t necessarily have to miss out on tax relief. You can carry forward any unused Annual Allowance from the previous three years.
The Pension Input Period: This is the period of time the Government used to measure your Annual Allowance. Different members may have different Pension Input Periods. Please get in touch if you want to know more.
Exemptions: Benefits you build up are normally subject to the Annual Allowance – except if you retire in serious ill health (which means where you have a life expectancy of less than one year) or you die.
What’s the Lifetime Allowance?
The Lifetime Allowance is what your pension benefits – from all of your different pension schemes – can be worth before you have to pay any tax charges. The Lifetime Allowance is currently just over £1 million and therefore does not affect the majority of members.
For help filling out your Lifetime Allowance form watch the video 'How to fill out a Lifetime Allowance and Bank Form' under 'Video Guides' on the Media Library.