Annual allowance

The annual allowance is the amount your pension savings can go up in any one tax year before you have to pay an extra tax charge on it. From the 2023/24 tax year the standard Annual Allowance amount for most members is £60,000.

Different rules apply if:

  • your taxable income (from all sources) is more than £200,000 (rate applicable to 2023/24) then a Tapered Annual allowance may apply to you. 
  • you have flexibly accessed any of your pension savings in a defined contribution pension scheme or qualifying overseas pension scheme, then the Money Purchase Annual Allowance rules may apply.

From 6 April 2016, the government introduced a tapered Annual Allowance for high earning members.

So if your ‘Threshold Income’ and ‘Adjusted Income’ exceeds the limits applicable to the tax year, your Annual Allowance (AA) is reduced.

The following table explains these terms and shows the relevant limits:

  Definition Limit 2016/17 to 2019/20 Limit from 2020/21 onwards Current limit from 2023
Threshold Income Broadly your taxable income after the deduction of your pension contributions (including AVCs deducted under the net pay arrangement) £110,000 £200,000 £200,000
Adjusted Income Broadly your threshold income plus pensions savings built up over the tax year £150,000 £240,000 £260,000
Minimum AA If your AA is tapered, the minimum AA that can apply £10,000 £4,000 £10,000

Threshold income includes all sources of income that are taxable e.g. property income, savings income, dividend income, pension income, social security income (where taxable), state pension income etc.

The taper reduces the AA by £1 for every £2 of adjusted income received over the threshold until the Minimum AA is reached. Action is based on the following:

For every £2 that your Adjusted Income exceeds the limit, your AA is tapered down by £1 to a minimum level of £4,000 for 2020/21 onward (or £10,000 for tax years before this and from 2023/24).

More information about the tapered annual allowance can be found on:

Annual Allowance ‘Flexible Benefit’ access

If you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015 then the Money Purchase Annual Allowance (MPAA) rules may apply. However, the MPAA will only apply if your total contributions to a money purchase arrangement in a Pension Input Period exceed the MPAA.

Generally, if you have flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, any further contributions you make to a money purchase scheme in subsequent tax years will be tested against the MPAA. If your contributions exceed the MPAA your defined benefit pension (LGPS) savings will be tested against the alternative AA and you will pay a tax charge in respect of your money purchase saving in excess of the MPAA.

Tax Year MPAA* Alternative Annual Allowance If MPAA is exceeded
2016/17 £10,000 £30,000
2017/18 to 2022/23 £4,000 £36,000
2023/24 onwards £10,000 £50,000

If you access flexible benefits you will be provided with a flexible access statement; you should provide us with a copy of this statement.

Flexible access means taking a cash amount over the tax-free lump sum from a flexi-access drawdown account, taking an uncrystallised funds pension lump sum (UFPLS), purchasing a flexible annuity, taking a scheme pension from a defined contribution scheme with fewer than 12 pensioner members or taking a stand-alone lump sum if you have primary but not enhanced protection.

Am I likely to be affected by the Annual Allowance?

Most of our members won’t be affected by the Annual Allowance because their pension savings won’t increase by more than the standard Annual Allowance of £60,000.

You are most likely to be affected by the Annual Allowance if:

  • You have a lot of scheme membership and you receive a significant pay increase
    You pay a high level of additional contributions
  • You are a higher earner
  • You transfer benefits from another LGPS or public sector pension scheme which may (in some cases) be subject to Final Pay protection and your pay has increased.
  • You have flexibly accessed benefits from a defined contribution pension scheme or qualifying overseas pension scheme.

How will I know if I have exceeded the standard Annual Allowance?

We’ll write to you if your current LGPS fund pension savings are more than the annual allowance in any tax year (ignoring any carried-forward allowance from the previous three years) not later than 6 October following the end of the relevant tax year.

You can also see an estimate of how much of the allowance you’ve used each year on your annual pension statement under the heading Your pension tax relief limits.

We won’t write to you if your benefits in your current LGPS fund do not exceed the standard Annual Allowance so if you have other pension benefits elsewhere or you think a lower Annual Allowance applies to you, then it is your responsibility to assess if all your pension savings, when added together, will (or are likely to) exceed the Annual Allowance threshold applicable to you. In this instance, we can provide accurate figures on request.

What happens if my pension savings exceed the Annual Allowance – can I use earlier years?

If your pension savings in any one year (including pension savings outside of your current LGPS fund) exceed the Annual Allowance applicable to you, then the excess is taxable as income unless you have any unused allowance from the previous three years which you can ‘carry forward’ to offset the tax charge due. Depending on the amounts of your unused pension savings in the three years and the amount of your excess will affect whether or not you have to pay an Annual Allowance tax charge.

Please note: to carry forward unused annual allowance from an earlier year you must have been a member of a tax registered pension scheme in that year.

If you have to pay an Annual Allowance Tax Charge, it is your responsibility to declare this to HMRC on your self-assessment tax return. If you have not registered for self-assessment you need to do so by 5 October.

For more information about this, please visit the GOV website which contains a calculator to help with this. www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

If you’ve received a letter from us telling you that you have exceeded the annual allowance limits please read the notes in your letter carefully. They give you step-by-step instructions for what to do next.

What’s included in calculating my pension savings?
Usually, any pension benefits you have in all tax-registered pension arrangements you’ve paid contributions into during the tax year (or if your employer has paid contributions on your behalf) are included in calculating your pension savings in a year.

How can I work out if I might be affected by the annual allowance?
This is quite complex, but in general terms, the increase in the value of your pension savings in the LGPS in a year is calculated by

working out the value of your benefits immediately before the start of the input period (5 April)
increasing the value by inflation (as currently measured by the Consumer Prices Index), and
comparing this with the value of your benefits at the end of the input period (i.e. the following 5 April).
In a defined benefit scheme like the LGPS the value of your benefits is calculated by multiplying the amount of your pension by 16 and adding any lump sum you’re automatically entitled to.

If the difference between

the value of your benefits immediately before the start of the tax year (the opening value), and
the value of your benefits at the end of the tax year (the closing value)
Plus

any contributions you paid into the scheme’s additional voluntary contribution (AVC) arrangement in the year or that you and your employer paid into the scheme’s shared cost AVC arrangement in the year
is more than the annual allowance level applicable to you, you may be liable to a tax charge.

Can you give me an example of how LGPS Pension savings are worked out?
Yes here is an example of an employee who has been an active member of the LGPS throughout 2018/19 and has also paid some AVCs.

Member has the following:

Final salary scheme membership: Membership up to 31/03/2008 (7 years which counts at 80ths). Membership 01/04/2008 to 31/03/2014 (6 years which counts at 60ths)
Final Pay* at 05/04/2023 - £60,000
Final Pay* at 05/04/2024 - £70,000
Care Pension at 2023 - £8,200
Care Pension at 2024 has grown to £9,630
Paid AVCs of £1,500 in 2023/24
The Consumer Prices Index for September 2022 is 10.10%

* Final Pay = this is usually the pensionable pay earned in your final year but certain elements of pay – for example, non contractual overtime – were not classed as pensionable under the Final Salary scheme so are not included to work out Final Salary benefits.

Working out the closing value of the member’s benefits for 2023/24

Closing value At 05/04/2024    
Annual Pension 7 / 80 x £70,000 £6,125.00
  6 / 60 x £70,000 £7,000.00
Care pension at 05/04/2019   £9,630.00
Total annual pension   £22,755.00
Multiply by 16   £364,080.00
Add lump sum 7 x 3 / 80 x £70,000 £18,375.00
To give closing value of   £382,455.00

 

Opening value at 6 April 2023    
Annual Pension 7 / 80 x £60,000 £5,250.00
  6 / 60 x £60,000 £6,000.00
Care pension at 05/04/2023   £8,200.00
Total annual pension   £19,450.00
Multiply by 16   £311,200.00
Add lump sum 7 x 3 / 80 x £60,000 £15,750.00
    £326,950.00
Increase by inflation as measured by CPI   x 1.101
To give an opening value of   £359,971.95

Do not add AVCs into the opening or closing values (these are added at the end)

Working out the increase in value during 2023/24

The increase in the member's benefits over the year to 5 April 2024 is £382,455.00 (closing value) less £359,971.95 (opening value) = £22,483.05 + £1,500 AVCs = £23,983.05

So providing this member does not have:

A lower annual allowance (as they do not have taxable income (from all sources) of more than £200,000 and they have not accessed any flexible benefits); and
Any other pension savings in 2023/24
There will not be an annual allowance tax charge as the total pension savings are below the standard annual allowance of £60,000

Below are two examples where members have breached their annual allowance limit in 2023/24.

In the first example there will not be a tax charge payable as the member is able to use previous year carry forward protection to offset the breach. In the second example, the member will have a tax charge as they have insufficient carry forwards to offset it.

What if I transferred pension rights from another pension scheme?

The method of valuing benefits in other schemes may be different to the method used in the LGPS.

If you transferred pension from another scheme into the LGPS, the value of the benefits relating to the transfer doesn’t count towards your pension savings in the LGPS in the year the transfer payment is received. Instead it is added to the opening balance in the following year.

What if my pension benefits are reduced after a pension sharing order?
If your LGPS pension benefits are reduced following a pension sharing order (because of divorce or dissolution of a civil partnership) then for the purposes of calculating the value of your pension savings in the LGPS, the reduction is ignored in the year that the pension sharing order is applied to your benefits.

What if I retire because of ill health?
If you retire because of permanent ill health and an independent registered medical practitioner certifies that it’s unlikely you will be able (except to an insignificant extent) to undertake gainful work (in any capacity) before you reach state pension age, there is no annual allowance tax charge on the ill-health retirement benefits you get.

What do I do if I have a tax charge?
If you go over the annual allowance limit and don’t have enough carry forward protection you will need to tell HMRC about it and pay the tax to them by completing a self-assessment tax return.

But can the scheme pay my tax charge?
It can pay the tax charge on your behalf in exchange for a permanent reduction to your pension), but only if:

the charge is more than £2,000, and
the amount relates to excess over the standard Annual Allowance threshold; and
your pension savingsin the LGPS alone exceeded the annual allowance limit; and
you have enough pension to cover the permanent reduction to your pension
you have not yet claimed your pension benefits; and
you elect before 31st July in the year after you exceed the annual allowance limit (for example, for a tax charge in respect of 2017/18 tax year, the deadline is 31 July 2019).
This is known as the mandatory scheme pays option.

Tools and information

Your annual allowance