The Annual Allowance 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. For the LGPS, the pension savings year runs from 1 April to 31 March. The annual allowance for 2018/2019 is £40,000.
Generally, the assessment covers any pension benefits you may have in all tax-registered pension arrangements where you have been an active member of the scheme during the tax year i.e. you have paid contributions during the tax year (or your employer has paid contributions on your behalf).
You would only be subject to an annual allowance tax charge if the value of your pension savings for a tax year increase by more than £40,000. However, a three year carry forward rule allows you to carry forward unused annual allowance from the last three tax years. This means that even if the value of your pension savings increase by more than £40,000 in a year you may not be liable to theannual allowance tax charge. To carry forward unused annual allowance from an earlier year you must have been a member of a taxregistered pension scheme in that year.
For example, if the value of your pension savings for a tax year increase by £50,000 (i.e. by £10,000 more than the annual allowance) and in the three previous years had increased by £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of £40,000 would more than offset the £10,000 excess pension saving in the current year. There would be no annual allowance tax charge to pay in this case.
Most people will not be affected by the annual allowance tax charge because the value of their pension saving will not increase in a tax year by more than £40,000 or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward.
If, however, you are affected you will be liable to a tax charge (at your marginal rate) on the amount by which the value of your pension savings for the tax year, less any unused allowance from the previous three years, exceeds £40,000.
Your Annual Benefit Statement will show how much your pension pot has grown in the previous tax year. Please contact us as soon as possible if your Statement shows a figure of £40,000 or more.
The lifetime allowance is the total capital value of all your pension arrangements, but not your state pension, which you can build up without paying extra tax.
If the value of your benefits when you draw them (not including any state retirement pension, state pension credit or any spouse’s, civil partner’s or dependant’s pension you may be entitled to) is more than the lifetime allowance you will have to pay tax on the excess.
The lifetime allowance for 2018/19 is £1.03 million. The lifetime allowance covers any pension benefits you may have in all tax registered pension arrangements – not just the LGPS.
Most people will never exceed their lifetime allowance, but if you do you will have to pay an additional tax charge on the excess above the lifetime allowance.
How do I work out the value of my pension savings to test against the lifetime allowance?
The following equation is used to work out the total value of your pension savings in the LGPS:
(Pension x 20) + Lump Sum (if applicable) + AVC Fund (if applicable) = Lifetime Allowance
For more information please visit the HMRC website: