Over the past 5 years, the tax charged by HM Revenue & Customs (HMRC) for people exceeding their LTA (the limit on benefits that can be crystallised in pension schemes) has tripled from £12 million in 2012/13 when the standard LTA was £1.5 million, to over £36 million in 2015/16. An excess above your LTA when the fund is drawn can attract tax charges of up to 55 percent. The current standard LTA is £1 million.

Your Annual Allowance for pension contributions (personal and employer) is £40,000 but this may be restricted if you flexibly access your pension pots: this is called the Money Purchase Annual Allowance (MPAA) and is set at £4,000 (from £10,000 previously).

A number of events will trigger the MPAA including: 

  • using Uncrystallised Funds Pension Lump Sums (UFPLS)
  • drawing of income from flexi-access drawdown
  • drawing in excess of the permitted maximum “capped drawdown”
  • use of scheme pension in schemes where there are less than 12 members.

If you take a tax free lump sum in conjunction with flexi-access drawdown but do not take a flexi-access drawdown pension, you will not trigger the Money Purchase Annual Allowance nor will drawing benefits under the “small pots” rules (deemed as small pension pots of up £10,000). Drawing benefits outside of the flexibility regime, such as fixed annuities, or through a scheme pension from a large scheme will also not trigger the Money Purchase Annual Allowance. 

‚ÄčTapered Annual Allowance

If your earnings in a tax year, including dividends, interest on savings, rental income and pension contributions (known as your ‘adjusted income’) exceed £150,000, your Annual Allowance for that year will reduce on a sliding scale – this is known as the Tapered Annual Allowance. For every £2 of adjusted income over £150,000, the Annual Allowance will be reduced by £1 down to a minimum of £10,000 gross (which will automatically apply to anyone who has an adjusted income of £210,000 or more).

The Tapered Annual Allowance does not apply if your ‘threshold income’ for the same tax year is £110,000 or less even if you have adjusted income of £150,000 or more. Threshold income is broadly similar to adjusted income except that pension contributions that entitle you to relief at source, and employer contributions resulting from a salary sacrifice (or similar arrangements) made before 9 July 2015, are excluded.

Carry forward of unused allowances

You can only carry forward unused Annual Allowance or Tapered Annual Allowance to a current tax year provided you have not triggered the Money Purchase Annual Allowance. Contributions paid in excess of any of the allowances are taxable at your marginal rate. 

It is therefore important that you manage your pension savings very carefully and speak to a financial adviser if you think you may reach or exceed the current limits on your allowances.