Pension Annual Allowance – What You Need to Know

Pensions are one of the most tax-efficient ways of building up retirement savings, however, it’s important that you understand your pension annual allowance to make sure you don’t encounter any unexpected tax bills.

In this article, we’ll discuss what the pension annual allowance is and how to manage it effectively.

So, let’s get into it…

If you’re ever in doubt about your own finances or want tailored financial advice based upon your personal circumstances, talk to one of our experienced financial advisers today.

Your Pension Annual Allowance

When you hear the term ‘Pension Annual Allowance’, this refers to the maximum amount of money that you can save into your pension within any one tax year, without having to pay tax charges. 

The standard allowance is £60,000, however, there are some exceptions where your allowance may be different.

For example:

  • If you have accessed money in your defined contribution pension then you may also be subjected to the Money Purchase Annual Allowance (MPAA) which limits the amount of contributions you can make into your DC pension while receiving tax relief of up to £10,000.
  • If your ‘adjusted income’ exceeds £260,000 per tax year and your ‘threshold income’ is more than £200,000, your annual allowance will be reduced by £1 for every £2 of excess adjusted income you have. This is called the Annual Allowance Taper.

If you think the money purchase annual allowance or annual allowance taper may affect you, talk to one of our financial advisers today who will be able to consider your personal circumstances and talk through any relevant information you need to know. 

Pension annual allowance with defined contribution pension schemes (DC)

If you have a defined contribution pension, then your annual pension allowance will be measured on your personal pension contributions (including tax relief) and any contributions made into it on your behalf (such as from your employer) during a tax year.

Pension annual allowance with defined benefit pension schemes (DB)

If you have a defined benefit pension scheme, then your annual pension allowance will be measured on the increase in your savings over a given year.

Exceeding your annual allowance

While it’s not always favourable, exceeding your pension annual allowance can happen, and when it does, you will need to pay back an annual allowance charge.

The rate of charge you’ll pay will depend on the tax band(s) that your income (and any additional contributions) falls into.

However, in certain circumstances, it can be possible to reduce or ‘avoid’ these charges by using ‘carry forward’. 

As the name suggests, carry forward allows you to carry forward any unused annual allowance from the previous three tax years. However, there are certain criteria that you have to meet, and as such, it’s important that you seek financial advice from a qualified adviser if this is something you wish to do. 

Additionally, if you’re close to or are exceeding the allowance limit and don’t meet the ‘carry forward’ criteria, there are some instances where you may benefit more by paying an excess charge.

Talk to a financial adviser to discuss your options and what will work for you and your finances.

Points to take away

As with any aspect of your financial life, it’s essential that you understand your pension annual allowance to ensure you’re making the most of your money, but also to stop you from encountering any unexpected tax bills.

A financial adviser can work alongside you to evaluate your pension circumstances, identify your pension annual allowance options and suggest more tax-efficient ways of making the most of your retirement savings.

They will also make sure to explain the short and long-term implications of each option.

Seeking financial advice when it comes to your pension annual allowance will allow you to feel confident about your pension decisions.

To get started with our experienced team of advisers today, why not get in touch?

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.

Disclaimer – This article has been written, and contains information, which is correct to the best of our knowledge. It is not intended to be a guide or suggestion to implement certain strategies. The value of investments (and the income you can derive from them) can fall as well as rise, and you may not get back all the money you invested. This article is not tax or legal advice. Always seek the guidance of a qualified financial adviser.

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