What restrictions are there on tax relief?
There are restrictions to:
- Your annual allowance: the amount of pension savings you can make each tax year.
- Your lifetime allowance: the overall value of pension savings that you can make over your entire working lifetime;
Pension savings made above either of these limits incur additional tax charges.
Latest allowances and restrictions
For 2020/21 tax year the allowance values are below.
This is £40,000 for most people. The two main exceptions are:
- Those with higher incomes will have a lower allowance. Higher incomes are typically over £150,000 but those earning over £110,000 need to check their circumstances.
- Those who have started to draw some of their pension savings flexibly (cash or income from flexi-access drawdown). This is known as the Money Purchase Annual Allowance, which is £4,000 in 2019/20 and 2020/21.
HMRC rules allow you to carry forward any unused allowances from the previous three years. This can allow larger contributions to receive tax relief.
More information on the annual allowance can be found here. Pension tax is complex and if you are unsure about how this may affect your pension, you are encouraged to seek independant financial advice.
This is £1.055 million in 2019/20. It will be £1.073 million in 2020/21 and is expected to rise each tax year with CPI.
The lifetime allowance is assessed at retirement. How your savings count towards your lifetime allowance depends on the type of pension you have.
- For DB members it is
- your pension at retirement multiplied by 20, plus
- any cash lumps
- For DC members (including AVC's) it is your fund value at the date you retire.
More information on the lifetime allowance can be found here. Pension tax is complex and if you are unsure about how this may affect your pension, you are encouraged to seek independant financial advice.