Tax limits and your pension

Updated following July 2015 Budget

When it comes to pensions, many members can pay into the scheme without ever having to worry about the size of their total pension pot, or how much their pension is growing year on year. But there are two key limits which affect some
members, and these are the lifetime allowance and the annual allowance, so we are featuring them here in case they become an issue for you.

Annual allowance

What is the annual allowance?

Annual allowance is a limit on the total amount each year that you can either:

• Pay into a defined contribution pension scheme, or
• Build up in a defined benefit pension scheme

As the Local Government Pension Scheme is a defined benefit pension scheme, it is the amount you build up (or pension savings) which applies. 

How are my pension savings assessed against annual allowance?

We calculate the increase in your pensions savings over the year from 1 April to 31 March using a formula provided by HMRC. The increase in your pensions savings is then measured against the annual allowance, which is currently £40,000. 

Am I likely to be affected by the annual allowance rules?

The annual allowance will not affect most members because the value of their pension savings will not increase by that much. However, you might be affected if you are a very high earner, a long serving member who receives a significant pay increase or make substantial additional contributions (such as APCs or AVCs). 

How will I know if I exceed the annual allowance?

We will write to you as soon as possible if your LGPS pension savings exceed the annual allowance limit in any year. However, we will only know if you have breached the annual allowance after the event. you should therefore consider whether you are likely to breach the annual allowance in the year to 1 April 2016 (for further details I think I may exceed the annual allowance - where can I find out more?).

What if I exceed the annual allowance?

If your total pension savings are greater that the annual allowance, you may have to pay a tax charge. This depends on whether you have any unused allowances from previous years that you are able to carry forward. 

If you have used up all your allowances and have a tax charge to pay, you may be able to ask us to pay the charge on your behalf and in turn we will reduce your benefits. This is known as the scheme pays facility.  

I think I may exceed the annual allowance - where can I found out more?

Further details about the annual allowance can be found on the HMRC website. 

In the meantime, this example may help:

Example

Mike is a long serving member and he earns £45,000 a year. He then gets promoted and his salary increases to £60,000 a year. Mike's pay rise also increases the pension that he has built up in the Fund. Using the formula prescribed by HMRC his pension has increased in value by £100,000 over the year. However, the annual allowance is only £40,000, therefore he has exceeded this by £60,000 (i.e. £100,000 - £40,000). He has unused allowanced from the previous three years (which is as far back as the HMRC will allow us to take into account), which reduces the excess to £30,000. Mike then has to pay a tax charge on this based on his marginal rate of tax. This is 40% and so the tax charge comes to £12,000. Mike dose not pay AVCs but if he had the tax charge would have been greater. 

So if you are a loner-serving member and expect to receive a significant pay increase, please consult our website for more information about the annual allowance. Very high earners should also note that you can breach the annual allowance without receiving a substantial pay increase. 

Budget update - July 2015

In his Summer Budget on 8 July 2015 the chancellor announced a number of changes to the Annual Allowance regime affecting pension savers with incomes over £150,000. 

HM Treasury have produced a public fact explaining these changes and the text of the factsheet is reproduced below for your information. 

HM Treasury

Public Factsheet - Annual Allowance Taper - July 2015 Budget

The Government is restricting the Annual Allowance for pension savers with incomes over £150,000. The change will have effect from April 2016. This factsheet will help you understand if this change might affect you. 

1. The Annual Allowance and the changes from April 2016

The Annual Allowance is the maximum amount of tax-relieved pension savings that you can make in one year. Currently it is £40,000. From April 2016 if you have an 'adjusted income' of over £150,000 for a tax year, you will have your Annual Allowance reduced for that tax year by £1 for every £2 of income you receive over £150,000. If your adjusted income is £210,000 or over, your Annual Allowance will be reduced by £10,000, but no lower. 

2. How to tell if you are affected 

If you have an 'adjusted income' of over £150,000 you may be affected by this measure. 

'Adjusted income' is your net income plus the value of any pension savings. These are defined as follows:

• Net income is the normal calculation of your income for tax purposes, i.e. all your taxable income, less the reliefs that you are entitled to, including relief on charitable contributions. Taxable income includes all your taxable earnings from employment, plus all taxable income from other sources including for example rental income. 
• Pension savings includes the value of both your pension contributions and any made by your employer. To find out the value of your pension contributions, you may need to request a pension saving statement from any schemes you are a member of. 

To provide greater clarity on who is affected, the restriction will be subject to a threshold of £110,000. If you have a net income of less than £110,000 you will not be affected by the taper. 

Any unused Annual Allowance you have from the three previous tax years will be able to be carried forward, as under the existing rules. 

3. What to do if you think you may be affected

If you think you are affected, you will need to report your income and savings through the existing self-assessment process for reporting an Annual Allowance charge. 

If you expect your adjusted income will be over £150,000 for the tax year 2016-17 and beyond, you may wish to review your pension arrangements in light of your personalised Annual Allowance. 

If you exceed your Annual Allowance, you will be subject to an Annual Allowance charge at your marginal rate of tax. 

4. Transitional arrangements and the alignment of Pension Input Periods

For some individuals, their pension year for tax purposes (known as a Pension Input Period) is different from the tax year. In order to make it easier for you to work out your pension savings over a tax year, Pension Input Periods will be aligned with the tax year. This means that only pension saving made in the tax year 2016-17 needs to be added to net income to work out the adjusted income for that year. 

Transitional rules in force from Budget day will mean that any pension savings you have already made in 2015-16 before the Budget will not be retrospectively taxed through an Annual Allowance charge. After Budget, prior to April 2016, pension saving can still be made up to £40,000 less any contributions already made before Budget. 

Next steps

If you think you will be affected by this measure you may wish to contact your scheme  and employer in order to review your pension arrangements. You may also wish to consider seeking advice from an advisor or accountant.