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Pensions and the annual allowance
How the annual allowance may restrict tax-efficient pension savings.
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Pensions and the annual allowance
Most of us can save quite happily in a pension scheme without having to pay any tax. However, the tax relief you get is restricted to 100% of your earnings (or £3,600 if greater). This is capped at the annual allowance of £50,000.
The annual allowance rules apply to everyone. But you will only have to pay the tax charge (at your marginal rate of income tax) if your pension savings are more than your annual allowance. If you haven’t used your full allowance, you may be able to carry this forward to another tax year.
You could be affected by the annual allowance if you:
- have more than one pension arrangement.
- are being made redundant and want to pay your redundancy payment into your pension scheme.
- are paying more than the annual allowance into PensionSaver.
- are paying additional voluntary contributions into the Harmsworth Pension Scheme.
- take the bridging pension from the Harmsworth Pension Scheme at retirement.
- take your benefits from the Harmsworth Pension Scheme after age 60.
- have previous defined benefit pensions built up from previous employments.
The annual allowance does not apply in cases of severe ill health or death. Age-related rebates and minimum contributions to a contracted-out money purchase plan (COMP) are also excluded.
Your total pension savings during the pension input period (PIP) are tested against the annual allowance. The PIP is the period over which contributions are measured against the annual allowance. It differs from scheme to scheme. For PensionSaver, the PIP runs from 6 April to the following 5 April. For Harmsworth Pension Scheme, the PIP runs from 1 April to the following 31 March.
The pension savings are worked out differently depending on the type of pension scheme you have.
For defined contribution plans, such as PensionSaver, your pension savings are the total contributions paid in by you and the company during the PIP. Fidelity has prepared a leaflet for members of PensionSaver containing more information.
For defined benefit schemes, such as Harmsworth Pension Scheme, your pension savings are the increase in your benefits during the PIP. DMGT Pensions will be contacting you if it looks like you will be affected by the annual allowance.
You are responsible for declaring any tax due on your self-assessment tax return. To help you do this you can ask the administrator of each of your pension schemes to tell you how much pension saving you have made in the tax year in that scheme.
If you can’t afford the tax bill and it is £2,000 or more, you can ask your pension administrator to pay it on your behalf from your pension savings.
You may need to take independent financial advice to get guidance about how to avoid paying the annual allowance charge and how to save tax-effectively outside of pensions.
More information about the annual allowance is available on the HMRC website where you will also find a useful Q&A.
In addition to the annual allowance, there is a lifetime allowance which limits the overall benefits that you can take from a pension scheme tax-efficiently.
The lifetime allowance is currently £1.8million but it is reducing to £1.5 million from 6 April 2012. You can find out more about the lifetime allowance on the HMRC website. If you are a member of the Harmsworth Pension Scheme, DMGT Pensions will be writing to you about this.
Source: Time For Money