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There are limits on the amount you can invest in pension plans without being subject to a tax charge.
These limits are known as the annual allowance, the tapered annual allowance, the money purchase annual allowance.
The lump sum allowance (LSA) was introduced from 6 April 2024, it replaced the lifetime allowance (LTA). The LSA limits the amount of tax-free cash you can access from your pension plan. Normally 25% of the pension savings you take can be paid tax-free, with an overall maximum limit of £268,275.
The total of all tax-free lump sums, including tax-free lump sum death benefits and serious ill-health benefits, will be tested against a lifetime limit, set at £1,073,100. Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax. This is known as the lump sum and death benefit allowance (LSDBA).
These allowances could affect your pension in other ways, please see the bottom of the page for more information.
Tax rules depend on your individual circumstances and could change in the future.
Annual allowance
What is the annual allowance?
Any pension contributions you make in a tax year count towards the annual allowance for that tax year.
What are the limits of the annual allowance?
The annual allowance for this tax year is £60,000, which means you could contribute £60,000 before a tax charge may apply.
Tapered annual allowance
If you have taxable income for a tax year greater than £260,000, you'll have your annual allowance for that tax year restricted. This means that for every £2 of income you have over £260,000, your annual allowance is reduced by £1. Your reduced annual allowance is rounded down to the nearest whole pound.
Your annual allowance can't be reduced to less than £10,000. So if you have an income of £360,000 or more you’ll have an annual allowance of £10,000. If you're caught by the restriction, you may have to reduce the contributions paid by both you and/or your employer or an annual allowance charge will apply.
We recommend you speak to a financial adviser for more information on the annual allowance or the tapered annual allowance.
Money purchase annual allowance
What is the money purchase annual allowance?
If you've already taken some of your pension savings, your future pension contribution limit may be restricted to the money purchase annual allowance (MPAA).
The money purchase annual allowance is lower than the annual allowance and it may apply if you chose to flexibly access your pension savings after 6 April 2015.
The government introduced the MPAA to make sure there's no room to abuse the tax relief that can be claimed on any new pension contributions by those who have taken some or all of their pension savings.
How does the MPAA work?
If you choose to access your pension savings flexibly, certain payments will trigger the MPAA. This means your annual allowance for contributions into defined contribution pensions would be reduced from £60,000 to £10,000 a year.
What triggers the MPAA?
- If you choose to take an income from a flexi-access drawdown plan set up from 6 April 2015.
- Taking a full or partial cash lump sum withdrawal from your plan.
- Taking an income above the maximum limit from an existing capped drawdown plan.
See our 'pension jargon and terms explained' at the bottom of this page for more information on capped drawdown.
What won't trigger the MPAA?
- Taking your 25% tax-free cash sum.
- Cashing in small pots.
- Taking an income from a capped income drawdown plan that's within the maximum limits.
- Additional designation from an existing capped income drawdown plan.
- Buying a lifetime annuity.
See our 'pension jargon and terms explained' at the bottom of this page for more information on cashing in small pots and capped income drawdown plans.
What do I need to do if the MPAA is triggered?
We'll let you know within 31 days of the MPAA being triggered.
You'll have 91 days to inform all pension plans you're contributing to that the MPAA has been triggered. If you join any new pension plans, you'll have a responsibility to let them know.
What about defined benefit pension plans?
If you're a member of a defined benefits pension plan and you've triggered the MPAA, the £60,000 annual allowance still applies to your total contributions/accrual. However, within your total £60,000 annual allowance, the maximum you can contribute to any defined contribution plans will be £10,000 before a tax charge applies. See our 'pension jargon and terms explained' at the bottom of this page for more information on defined benefit pension plans.
We recommend you speak to a financial adviser for more information or if you think this applies to you.
Pension lifetime allowance
Before 6 April 2024, the lifetime allowance limited the amount of pension savings that could be built up without paying additional tax. This allowance was abolished from 6 April 2024.
There are limits on the maximum value of pension savings that you or your beneficiaries can take tax-free, without being subject to a tax charge. These limits are known as the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA).
The lump sum allowance (LSA) was introduced from 6 April 2024 and is the maximum amount of pension savings that you can receive tax-free across your pensions. Normally 25% of the pension savings you take can be paid tax-free, with an overall maximum limit of £268,275. The other 75% of your pension savings is taxed at your marginal rate of income tax.
The total of all tax-free lump sums, including tax-free lump sum death benefits and serious ill-health benefits, will be tested against a lifetime limit, set at £1,073,100. Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax. This is known as the lump sum and death benefit allowance (LSDBA).