Are there any limits for pension saving?
There are two important allowances.
Annual Allowance
The member should be aware of the Annual Allowance. It is the maximum amount of pension savings a member can make each year that benefit from tax relief including any contributions paid by their employer. There is no restriction on the amount that can be saved, but only a certain amount will get tax relief and if the Annual Allowance is exceeded an Annual Allowance charge may be payable.
The rules apply to everyone who is a member of a registered pension scheme.
From 6 April 2023, the AA increased from £40,000 to £60,000.
The adjusted income limit will increase from £240,000 to £260,000 and, where tapering applies to reduce the AA for an individual, the minimum tapered AA will be £10,000 (up from £4,000).
Lifetime Allowance (LTA)
This is the amount of pension savings an individual can accumulate from all registered pension arrangements, anything above this amount will be subject to a lifetime allowance charge.
If the member had built up substantial pension savings as at 6 April 2006 then they may have applied to HMRC for protection against the lifetime allowance charge. Members may also have applied for Fixed Protection 12, Fixed Protection 14 and Fixed Protection 16, they can also apply for Individual Protection 14 or Individual Protection 16.
A member could have applied for a Lifetime Allowance which is higher than the standard Lifetime Allowance.
A lifetime allowance test is triggered on certain events such as:
Starting to take pension benefits is the most common event that triggers the test. The member must advise full details of all pensions they are entitled to as they are jointly responsible with the scheme administrator for paying any tax charge due.
Each time the member takes pension benefits the scheme administrator calculates how much of the lifetime allowance as been used up.If the lifetime allowance has been used up then the member will be told the tax charge that is due.
LTA CALCULATION EXAMPLE
The current (2022/23) standard Lifetime Allowance is £1,073,100.
A member is retiring and the pension is calculated as £10,000 p.a.
This amount is multiplied by a factor of 20 to get a cash value.
The percentage of the LTA used up is therefore: (£10,000 x 20) / £1,073,100 x 100 = 18.6%
You have seen that income can come from a variety of sources but how much will the member actually receive?
The amount actually received depends on whether the income is taxable or not.
