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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 lifetime allowance LTA is a limit on the value of pension savings you can build up without paying a tax charge but has been removed from 6 April 2023. It could still affect your pension in other ways, please see the bottom of this page for more information.
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.
Tax rules depend on your individual circumstances and could change in the future.
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 cant 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.
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.
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.
We recommend you speak to a financial adviser for more information or if you think this applies to you.
Lifetime allowance
Lifetime allowance (LTA) was previously defined as a limit of pension benefits that could be built up without an additional tax charge applying.
Until 6 April 2023, if you took benefits from your plan that were more than the lifetime allowance, you paid a charge on the excess known as the LTA charge. The LTA limit was £1,073,100. From 6 April 2023, the LTA charge is removed, although the lifetime allowance could affect your pension rights in other ways. We recommend you speak to a financial adviser for information if you think this applies to you.
The following benefits that were subject to a 55% LTA tax charge on benefits taken above the LTA threshold will instead be subject to Pay as you Earn (PAYE) on the excess at your marginal rate of income tax:
- Lifetime allowance excess lump sum
- Serious ill-health lump sum
- Defined benefits lump sum death benefit
- Uncrystallised funds lump sum death benefit.