Your pensions Annual Allowance
Since 2006, the government has limited the amount of tax relief that you can receive on pension contributions. The current Annual Allowance is £40,000.
In defined benefit schemes like those administered by SPPA, the allowance is measured against the annual growth in your pension during what’s called the ‘pension input period’ (which is the tax year from 6 April to 5 April each year).
It’s calculated as the increase in the value of your pension benefits (annual pension and any lump sum) after allowing for inflation (which is pegged to the Consumer Price Index).
Annual Allowance covers all of your pension savings except the State Pension and contributions to any arrangement you have must be taken into account.
For SPPA-administered pensions, your increase in ‘pension savings’ will be multiplied by a factor of 16 then added to any increase in lump sum to see if you’ve exceeded the Annual Allowance for that tax year.
What happens if you exceed the Annual Allowance?
If you exceed the £40,000 Annual Allowance limit in one of our schemes, we'll issue you with a pension savings statement by 6 October in the following tax year. It will show your 'pension input amounts' for the current year and three previous years. You can also request pension savings statement at any time.
If you do have to pay an Annual Allowance tax charge, you'll have options to either deal directly with HMRC or to use the Scheme Pays option which will mean that SPPA manages the process on your behalf.
Carrying forward unused allowance
If you have unused Annual Allowance from the previous three years, you can carry this forward to offset any charge.
Tapered Annual Allowance
If you earn more than £110,000 from all your sources of income, you’ll be affected by what’s known as ‘Tapered Annual Allowance’.
Effectively, this mechanism reduces your Annual Allowance on a phased basis from £40,000 down to a minimum of £10,000 depending on how much you earn.
If you’re earning more than £110,000, you may need to seek professional advice to ensure you manage your Annual Allowance effectively.