Annual Allowance
The information provided on this page is intended as a general overview of the issues and options surrounding the Annual Allowance. If you think you may be effected, you should seek independent financial advice.
Please note that from 6 April 2015, different Annual Allowance rules apply to individuals who flexibly access defined contribution pension savings.
At the end of each Pension Input Period (PIP), the increase in pension benefits from all of an individual’s pension arrangements is assessed against an Annual Allowance. From 6 April 2016, the PIP will run from 6 April to 5 April.
The current Annual Allowance limit is £40,000 which, for a Defined Benefits scheme such as ULPF, USS and the NHS Pension Scheme, is roughly equivalent to an increase in annual pension of £2,100. Payments made to a Defined Contribution Scheme such as the USS Money Purchase AVC with Prudential are based on the cash value of contributions made within the PIP.
For the PIP starting on 6 April 2016, the Annual Allowance limit will remain at £40,000, however the Annual Allowance will be gradually reduced for some individuals with higher taxable earnings. This is known as the Tapered Annual Allowance.
The Tapered Annual Allowance
For the current pension input period, ending on 5 April 2016, there is a single Annual Allowance of £40,000 for everybody.
From 6 April 2016, the Annual Allowance may be reduced for individuals who have a “Threshold Income” of over £110,000, based on their “Adjusted Net Income” figure earned between 6 April 2016 and 5 April 2017. For pension scheme members, Adjusted Net Income includes elements such as salary, rental income, dividends, royalties etc. For every £2 that the Adjusted Net Income is over £150,000, the standard Annual Allowance of £40,000 will be reduced by £1, with this tapering stopping at £210,000 by which point the Annual Allowance will have been reduced to £10,000.
Further information on the Adjusted Net income can be found using the links, below.
What happens when the Annual Allowance is breached?
Where the growth in an individual’s pension benefits breaches the Annual Allowance in a particular Pension Input Period then there may be a tax charge. Where an individual pays into more than one pension arrangement, they should check the Annual Allowance value of their benefits with each arrangement to ensure that they have not breached the Annual Allowance once all pension savings are taken into account.
Where there has been an Annual Allowance breach, individuals can call upon unused Annual Allowances from the previous three Pension Input Periods to mitigate or in some cases eliminate the breach. If, after accounting for unused Annual Allowances there is still a breach, then a tax charge will be payable. If this tax charge is greater than £2,000 then scheme members can elect for their pension scheme to pay the tax on their behalf. Where the scheme pays the tax on behalf of a member, a corresponding deduction will be applied to their scheme benefits.
Further Information
USS Annual Allowance Modeller (Final Salary section members)
The NHS Pension Scheme Tax Information Page
HMRC Policy Paper on the Tapered Annual Allowance