Back in 2016, changes were made affecting the amount that can be saved into pensions. These changes impacted both savings into defined benefit and defined contribution schemes, including occupational and personal pensions.
At Wesleyan we’re used to change. Having been around for over 180 years, you could say we’ve seen it all. One thing that won’t change however, is our commitment to securing the financial futures of societies most trusted professions.
Understanding your annual allowance
In a nutshell, the annual allowance (AA) is the maximum amount you can save into your pension pots in a tax year, without incurring a tax charge.
So how is the amount of your AA used calculated in different schemes? Well, for defined benefit schemes, it’s the increase in benefits over the tax years that are included. For defined contribution schemes, it’s the total amount paid in a tax year by you, or anyone else on your behalf. This is your pension input.
The tax charge could be up to 45% of the saving above the AA, depending on other taxable income and your highest income tax and. You can also carry forward any unused allowance from the 3 previous tax years.
The annual allowance is currently £40,000, but will be tapered for those with adjusted income (taxable income plus your pension input) of more than £240,000. The maximum reduction is £36,000, so for anyone with adjusted income of £312,000 or more, the tapered annual allowance will be reduced to £4,000.
People caught by this rule will have their AA reduced by £1 for every £2 income over £240,000, down to a minimum of £4,000 per annum.
Protecting your lifetime allowance
The lifetime allowance (LTA) has been frozen at £1,073,100 until the 2025/26 tax year. If your pension savings are worth more than this, or you expect them to be worth more than this when you take benefits, then you may be able to apply for LTA protection.
LTA protection is designed to protect existing benefits when the LTA limit was reduced in 2016 and provides you with a personal LTA which is higher than the standard LTA - therefore reducing or eliminating the LTA tax charge when benefits are taken.
You can apply to HMRC for one or both of the LTA protections, subject to eligibility criteria. There are currently only two LTA protections available, but members may have historic protections. These are known as Fixed Protection 2016 (FP16) and Individual Protection 2016 (IP16), and are designed to protect existing pension savings.
IP16 will give you a personal LTA equal to the lower of either the value of your benefits at 5 April 2016 or £1.25 million. FP16 will give you a personal LTA of £1.25 million. In 2016, HMRC launched their self-service system allowing you to apply for these protections via your online account. This can be accessed through online.hmrc.gov.uk
This information is based on our current understanding of legislation. Legislation and tax treatment can change in the future.
If you would like to discuss any aspect of your personal finances with a Specialist Financial Adviser from Wesleyan Financial Services, please just book an appointment.