From 6 April 2020 new Annual Allowance limits will apply. Please read the information carefully as the amounts will be different to what you may have been advised for tax years before 2020/21.
What is the Annual Allowance?
It’s the limit on how much you can save into a pension over a tax year (which runs from 6th April to 5th April), without paying an annual allowance tax charge.
From 6 April 2020 if you earn less than £150,000 the Annual Allowance is currently £40,000. That means you can pay up to £40,000 into your retirement savings and still receive tax relief on it.
If you earn over £150,000, you might be subject to the lower ‘tapered Annual Allowance’. This will start to reduce your Annual Allowance, based on how much your total earnings are.
If your total earnings are £300,000 or more, you will have an Annual Allowance of £4,000, which will not reduce any further.
You can find out more about this on the Government’s website.
This limit applies across all pensions you’re paying into so, if you’re paying into more than one, you’ll need to add up all your pension contributions to determine whether you’re paying more than the Annual Allowance that applies to you.
What happens if I go over the Annual Allowance limit?
You may be subject to a tax charge. This can be as much as 40% of the amount you’ve gone over the £40,000 limit or your individual lower tapered Annual Allowance.
You may be able to carry forward any unused allowance from the previous three tax years, to the current tax year if you’ve exceeded the £40,000 limit. To find out if you can do this please go to the Government website here.
What is the Lifetime Allowance?
Where the Annual Allowance is all about the money you’re building up, the Lifetime Allowance applies when you come to take your savings.
It’s currently set at £1.073 million (from April 2020) if your savings from all your pension plans (but not the State Pension) add up to more than that amount, you could be subject to an additional tax charge.
Each time you take money out of a pension scheme (and that can be a lump sum or a regular payment), the amount of the money you’re taking is compared against your remaining Lifetime Allowance. If you take more than £1.073 million, there will be additional tax to pay on the excess.
You’ll receive a statement from the Plan telling you how much tax you owe if you go over the Lifetime Allowance and the tax will come out of your retirement savings before you start getting your pension.
The rate of tax you pay on your retirement savings above your Lifetime Allowance depends on how the money is paid to you:
- 55% if you get it as a lump sum
- 25% if you get it any other way e.g. regular income or cash withdrawals
The Lifetime Allowance has lowered quite a bit over the last few years, and so the Government has brought in some ways to protect it.
If your total pension savings exceeded £1 million on 5th April 2016, you can still apply for Individual Protection 2016 and Fixed Protection 2016. Go to the Government’s website to find out if you qualify and, if you do, how to apply for protection.
What protection is available?
Individual protection: You can apply if your pension(s) savings were more than £1 million at 5 April 2016.
This will protect your Lifetime Allowance to the lower of:
- The value of your pension(s) at 5 April 2016
- £1.25 million
You can keep building up your pension, but you’ll have to pay tax on money taken from your pension(s) that exceeds your protected Lifetime Allowance.
Fixed Protection: Fixed Protection 2016 maintains the Lifetime Allowance at £1.25 million. You can apply for Fixed Protection 2016, as long as you don’t already have:
- Primary Protection
- Enhanced Protection, or
- any earlier version of Fixed Protection (Fixed Protection 2012 or 2014, which you can still have but can no longer apply for)
There’s no minimum benefit value needed to apply for Fixed Protection. That means that it could be appropriate for people who are currently not close to the £1.25 million mark, but think they could be by the time they reach their retirement age.
You can find out more about these protections on the Government website, and apply online. You can also use the Government site to find out more about any existing protection you may have, and when these may be lost.
You can lose enhanced protection or any type of Fixed Protection if:
- you make new savings in a pension scheme
- you are enrolled in a new workplace pension scheme
- you transfer money between pension schemes in a way that doesn’t meet the transfer rules
- you’ve got enhanced protection and, when you take your pension benefits, their value has increased more than the amount allowed in the enhanced protection tax rules - this is called ‘relevant benefit accrual’
- you’ve got Fixed Protection and the value of your pension pot in any tax year grows at a higher rate than is allowed by the tax rules - this is called ‘benefit accrual’
You will need to tell HMRC of any changes and you can find out more by going to their website.
To find out the value of your retirement savings in the Morgan Sindall Plan you can contact the Plan Administrator or login.
If you’re worried about going above the Annual or Lifetime Allowance limits, you can lower your contributions that you’re paying in. You can use the help and information page or speak to an independent financial advisor for further help. To find out more about lowering your contributions, check the details on the changing contributions page.
The tax information on this page is based upon a current understanding of tax rules, and may change in the future.