Annual and Lifetime Allowances

Annual Allowance

There’s a limit on how much pension you can build up in a year before you pay tax – this is the Annual Allowance. If you go over it, you’ll usually have to pay an Annual Allowance tax charge.

The ‘standard’ Annual Allowance is £40,000

HMRC sets the Annual Allowance to limit the tax benefits you can get from building up your pension. If you go over it, you’ll usually have to pay tax on the amount you’ve gone over by. At the moment, the ‘standard’ Annual Allowance is equivalent to £40,000 as a lump sum. This is for the tax year 2020-21. This allowance includes all your pension arrangements – including any workplace pensions or private pensions you have, but not including the state pension.

It’s lower for higher earners

If your total taxable income (from employment plus all other sources) plus the amount you build up in your pension (from all contributions, plus any yearly increases) is more than £240,000 a year, your Annual Allowance is lower. The more taxable income you have, the lower your Annual Allowance. Your Annual Allowance will not be lower than the equivalent of £4,000 as a lump sum. If you’ve already taken some money from one or more of your defined contribution pension schemes, your figure could be as low as £4,000. Again, if you go over the allowance, you’ll have to pay tax on the amount you’ve gone over by.

These allowance figures are for the tax year 2020-21. HMRC reviews these figures every year, so they might change for future tax years. There's more information about what the Annual Allowance was for previous tax years on HMRC’s website.

The Annual Allowance covers all your pension arrangements, so you’ll need to check how much pension you’ve built up each year in total

If you think you might be close to going over the Annual Allowance, you need to check how much pension you’ve built up across all your pension arrangements.

Contact any other schemes you have pensions with, to check how much you have with them.

There are options if you think you might go over the Annual Allowance

If you reach the Annual Allowance, you might be able to use up spare allowance from the last three years. This might mean you don’t have to pay some or any of the extra tax.

You can get advice from an independent financial adviser

You can also get advice from an independent financial adviser – they’ll be able to tell you about other options if you’re close to going over the Annual Allowance.

Lifetime Allowance

There’s a limit on how much pension you can build up in a lifetime – this is the Lifetime Allowance. If you go over it, you’ll usually have to pay more tax.

The Lifetime Allowance is £1,073,100

The Lifetime Allowance limits the total amount you can build up in all of your pension arrangements – including any workplace or private pensions you have, but not including your state pension. The current limit in the 2020-21 tax year is equivalent to £1,073,100 as a lump sum.

If you go over the limit, you’ll usually have to pay extra tax. You won’t pay this extra tax until you start taking your pension.

To calculate the equivalent lump sum value of your pension income from your core defined benefits, you need to multiply your expected annual pension by 20. For instance, if you’re on track for a pension income of £20,000 a year when you reach your pension age, your pension is worth the equivalent of £400,000. If you’re on track for a total pension of £54,000 a year, you’re likely to exceed the current Lifetime Allowance limit. Please note you would also need to include the projected value of any Additional Pension Contributions (APeCs) and/or Additional Voluntary Contributions (AVCs) you have in addition.

See how much pension you’ve built up in total in the Fund 

Because the Lifetime Allowance covers all of your pension arrangements, you might need to contact the other schemes you have pensions with too, to check how much you have with them.

The Allowance is likely to go up each year

The Allowance is expected to increase every year in line with the Consumer Prices Index (CPI), a measure of inflation.

You might have options if you’re over the Lifetime Allowance

You might be able to apply to protect your pension from the extra tax charges of the Lifetime Allowance. There’s more information about this on the gov.uk website.

You can get advice from an independent financial adviser

If your pension arrangements are close to or over the Lifetime Allowance, or if you think they’re likely to be in the near future, you might want to get professional advice. An independent financial adviser can help you work out how to get the most out of your pension savings. You can find a regulated financial adviser at moneyadviceservice.org.uk/directory.

If you’d like to stop building up pension, you can opt out on RBSelect online

If you want to, you can choose to stop building up future pension. You will still have the pension and other benefits you’ve already built up, plus yearly increases, but you won’t build up any more on top of that. Some people choose to opt out if they’re close to going over the Annual Allowance or the Lifetime Allowance, because of the extra tax mentioned above.

Once you’ve opted out, you can’t opt back in again. So please think carefully before doing this. You might want to get independent financial advice first.

Opt out of building up future pension in the Fund 

Listed below are links to government information about your allowances:

Annual Allowance  Lifetime Allowance  Money Purchase Annual Allowance  Annual Allowance Carry Forward  Protecting your Lifetime Allowance