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It's not that hard to fall foul of pension limits...

The beauty of pension saving is tax efficiency, but breaching the limits can create significant tax liabilities.

As the Lifetime Allowance and the Annual Allowance have not kept pace with inflation over the last fifteen years, more and more people are being caught out. It's quite hard to keep tabs on these allowances, especially in Defined Benefit schemes where a pay raise can significantly increase your projected notional "contributions".

So, what is the Lifetime Allowance? Currently, it's £1,073,100 for money purchase pensions (2021/22), so you can see why over a long period of time, taking into account investment growth, more and more people are reaching the limit.

Find out more about the allowances in our FAQ's section at the bottom of the page.

Need pointing in the right direction?

We have been providing expert pension guidance for over 30 years and have helped many clients navigate their way through the complex pension rules and legislation.

If you are concerned about breaching the Annual Allowance or Lifetime Allowance, our team of pension specialists are here to help. With many options available to avoid or reduce your tax liabilities, they can help find the most suitable for you.

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Our comprehensive service...

Our free, no-obligation discovery meeting gives us chance to find out more about you and explore the areas of advice you might need.

If you then go on to work with us, we will look at your finances as a whole and will create a plan for the future based on your life goals, career aspirations and financial objectives. Inevitably, your pension provision will form a significant part of our discussions and we will also use cashflow modelling tools to stress-test your finances to see how different scenarios and life events could affect them over the long-term.

We will meet with you regularly to ensure your plan remains fit for purpose and that you remain on track to your goals. There is a charge for our Financial Planning service, but this would always be agreed before we undertake any work on your behalf.

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We're here for tax advisers too...

We often help accountants with complex tax advice surrounding pensions for high earners. If you need a sounding board we are here to help.

Likewise for solicitors working on pension sharing cases, we are happy to offer any support we can.

FAQ's

What is the Lifetime Allowance?

The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.

Some of the questions people ask us:-

If my pension is invested, how will I know if I'm likely to have an LTA issue in the future?
I'm in a Defined Benefit Scheme, does this affect me?
What can I do to avoid the situation?

There is some helpful guidance published by the Pensions Advisory Service which helps set out all the rules.

If you do breach the LTA, you will trigger a tax liability. The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you. The rates are:

55% if you get it as a lump sum25% if you get it any other way, for example, pension payments or cash withdrawals

The Pensions Advisory Service

What is the Annual Allowance?

Simply, the annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000 (2021/22).

From 6 April 2014 the annual allowance for tax relief on pension savings in a registered pension scheme was reduced to £40,000. This includes contributions made by anyone else into your pension such as your employer. If your pension savings exceed this amount you may have to pay a tax charge and give details of this on a Self Assessment tax return.

In a Defined Benefit Scheme, the "benefit" during the year must not exceed a defined limit and this is worked out with a specific formula based on the increase in CPI during the pension input period.

HMRC guidance on Annual Allowance

What is the Tapered Annual Allowance?

The annual allowance for pension contributions is £40,000, however, for high earners, this allowance is tapered.

The tapered annual allowance came into force as of 6 April 2016 for high earners. These individuals are defined as those with:

an 'adjusted income' of over £240,000 for the year, and
'threshold income' of over £200,000

For the taper to apply, both income limits must be exceeded. For every £2 of adjusted income over £240,000, £1 of an individual's annual allowance will be lost. The maximum reduction will be £36,000, therefore reducing the annual allowance to £4,000 for anyone with an income of £312,000 or above (2021/22).

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FMB Financial Management Bureau Limited, Shenstone House, Helsington, Kendal, Cumbria LA8 8AA. Telephone: 01539 725855 Email: info@finman.co.uk

Financial Management Bureau Limited is authorised and regulated by the Financial Conduct Authority.
Financial Management Bureau Limited is a limited company registered in England and Wales. Registered office: Shenstone House, Helsington, Kendal, Cumbria LA8 8AA. Registered number: 02089786
The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service please visit www.financial-ombudsman.org.uk

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