Here are the latest pension tax allowances for the year 6 April 2021 – 5 April 2022 and information on how these could affect members.
Annual Allowance
The Annual Allowance is the limit on the amount of pension savings that can benefit from tax relief in a single tax year. This limit is equal to 100% of annual earnings, or £40,000 in each tax year, whichever is lower.
If members have a Defined Benefit pension arrangement (also known as ‘final salary’ or ‘career average’), then the value of the benefits they build up during the tax year is measured against the Annual Allowance. If they are members of a Defined Contribution arrangement (also known as ‘money purchase’ and including the BRASS, AVC Extra and the IWDC Section arrangements), then it is the total of any contributions paid in during the year that is measured against the Annual Allowance. This includes contributions paid by employers as well as members. The Annual Allowance applies to all pension schemes that members belong to and is not a “per scheme” limit.
Tapered Annual Allowance
If members are high earners, they may be subject to a lower Annual Allowance, known as the Tapered Annual Allowance. This lower limit comes into effect if their ‘threshold income’ (i.e. annual income from all sources before tax) is over £200,000 and ‘adjusted income’ (i.e. their annual income before tax, plus the level of their pension savings) is over £240,000. For every £2 of adjusted income over £240,000, members lose £1 of Annual Allowance, up to a maximum reduction of £36,000. This means that anyone with an adjusted income of £312,000 or more has a Tapered Annual Allowance of £4,000.
Money Purchase Annual Allowance
If members have started to draw money from any Defined Contribution arrangement, then (regardless of income) future savings made to a Defined Contribution arrangement may be subject to a lower annual allowance of £4,000. This is known as the Money Purchase Annual Allowance.
Your members would need to check the rules to see if the Money Purchase Annual Allowance applies to them (see ‘Further information’ below) but the main situations when they might trigger the Money Purchase Annual Allowance are if they:
- take all of their Defined Contribution savings as a lump sum
- start to take ad-hoc lump sums from their Defined Contribution savings
- put their Defined Contribution savings into an income drawdown fund and start to take an income
- were in a flexible drawdown arrangement before 6 April 2015.
HMRC found that around 260,000 pension savers triggered the Money Purchase Annual Allowance in 2020. These individuals will now have to pay tax on any Defined Contribution savings above £4,000 in a tax year.
Lifetime Allowance
The Lifetime Allowance is the limit on the total amount of pension savings that can benefit from tax relief. The Lifetime Allowance affects those with the largest pension savings and 95% of pension scheme members approaching retirement are unaffected by it. In the Spring Budget 2021, the Chancellor announced that the Lifetime Allowance will stay at its current level of £1,073,100 until 2026. This limit had been expected to increase every tax year in line with inflation.
Further information
More detailed information on the Annual Allowance, Money Purchase Annual Allowance and Lifetime Allowance can be found here. Members can also find out more information in the resources section of railwaypensions.co.uk or btppensions.co.uk.