Know the limits

Annual Allowance (AA)

The Annual Allowance (AA) is a limit to the total amount of contributions that can be paid to defined contribution (DC) pension schemes and the total amount of benefits that you can build up in defined benefit (DB) pension schemes each year, for tax relief purposes.

The AA was initially set at £225,000pa in 2006 and whilst it steadily increased for several years, then has more recently reduced, it is currently capped at £4,000 may apply if you have cashed out a DC pension under the new pension freedoms introduced in April 2016. You should have been advised by the Scheme paying the pension lump sum to you if this reduced AA (referred to as the ‘Money Purchase Annual Allowance’) applies to you going forward. In addition, your Annual Allowance may also be reduced if you have ‘Adjusted Income’ of over £150,000 (referred to as the ‘Tapered Annual Allowance’), but the complicated rules mean those earning less may also be affected. Please click here for further information on the changes to Annual Allowance announced in the 2015 budget.

The AA applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all pensions savings that you, your employer, and anyone else make on your behalf. If you exceed the AA in a tax year you will be faced with an Annual Allowance tax charge on the value of the excess. In addition, if you have paid any DC or AVC type contributions you won't receive tax relief on those deemed to have exceeded the limit.

You may however, be able to bring forward any unused Annual Allowances from the previous three tax years, to help reduce the Annual Allowance charge.

For more information on your taxation and the changes introduced by the Budget in 2015, please refer to the Taxation section.

Lifetime Allowance (LTA)

The Lifetime Allowance (LTA) is the maximum amount you can take in pension benefits during your lifetime from all pension schemes before an additional tax charge is incurred. If the LTA is exceeded, you will be subject to the LTA tax charge. It is unlikely for the majority of members that the LTA will be exceeded, therefore no charge would apply.

The LTA was initially set at £1.5m in 2006 and has steadily changed in recent years:

Retirement Date

Lifetime Allowance

6 April 2014 to 5 April 2016

£1.25 million

6 April 2016 to 5 April 2018

£1 million

6 April 2018 to 5 April 2019

£1.03 million

From 6 April 2019

To be confirmed*

* Changes to the Standard Lifetime Allowance are announced by the Government in the Budget each year.

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