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Tax Limits

and your pension

Tax limits and your pension

Pensions are a tax efficient method of saving for your future, since pension contributions are generally tax free. But there are two key tax limits that you should know about - the annual allowance and the lifetime allowance. Most scheme members’ pension savings will be less than these allowances, but if you do go over either allowance, this may result in a tax charge.

Annual Allowance

Lifetime Allowance

Annual Allowance


The annual allowance (or AA) is the amount by which the value of your pension benefits may grow in any one year without you having to pay a tax charge. This is in addition to any income tax you pay on your pension once it is in payment. If the value of your pension savings in any one year (including pension savings outside of the LGPS) are in excess of the AA limit the excess will be taxed as income.
The standard AA in recent years has been as follows:

Pension Input Period (PIP) Standard AA
1 April 2011 to 31 March 2012 £50,000
1 April 2012 to 31 March 2013 £50,000
1 April 2013 to 31 March 2014 £50,000
1 April 2014 to 31 March 2015 £40,000
1 April 2015 to 5 April 2016 PIP is split into two part-year PIPs
1 April 2015 to 8 July 2015 £80,000
9 July 2015 to 5 April 2016 Nil but up to £40,000 of unused allowance from the first part-year PIP can be carried forward to this part-year PIP
6 April 2016 to 5 April 2017 £40,000 (unless tapering applies)
6 April 2017 to 5 April 2018 £40,000 (unless tapering applies)

Most people will not be affected by the AA tax charge because the value of their pension savings will not grow enough during a year, or if it does they are likely to have unused allowance from previous years that they can carry forward.
You are most likely to be affected if:

  You have a lot of membership or pension build up in the scheme and you receive a significant pay increase, and/or;

  You pay a high level of additional contributions (for example, additional voluntary contributions (AVCs), and/or;

  You have bought extra pension (for example additional pension contributions – APCs);

  You are a better paid member, and/or;

  You transfer into the LGPS from a previous public sector pension scheme under the preferential club transfer rules and your full time salary in the new job is higher than the full time salary in the previous job, and/or;

  You combine a previous LGPS pension benefit that was built up in the final salary section of the LGPS with your current pension account and your full time salary has increased significantly since leaving and re-joining the scheme, and/or;

  You have accessed flexible benefits on or after 6 April 2015


If you are unsure about whether you will be affected by the AA, you should seek independent financial advice from an advisor registered with the Financial Conduct Authority who has knowledge of the LGPS.
For help in choosing an independent financial advisor visit the Money Advice Service - choosing a financial advisor opens in new window page.

We will automatically inform you if your LGPS pension savings exceed the standard AA limit in any year (including any AVCs you have paid to one of our in-house arrangements) or if we believe that you have exceeded the Money Purchase AA by no later than 6 October of the following tax year.

If you think you are affected by the Tapered AA you won't always get a statement from us, in which case you will need to ask us for one.

To work out by how much your LGPS benefits have grown (that is, your LGPS pension savings or 'Pension Input Amount'), we compare the value of your benefits at the start and the end of something called the Pension Input Period (PIP). By the way, this takes account of inflation to keep things fair.

Your benefits include your pension, any standard lump sum (you usually have an entitlement to a standard lump sum if you were a member of the LGPS before 1 April 2008), plus anything you have paid into AVCs.

If the pension input amount is more than the AA, there could be a tax charge due.

The AA applies to your total pension savings for all tax registered pension arrangements that you still pay into. This means that you will need to obtain the growth in your pension savings from each arrangement you are saving with.

The Pension Input Period (PIP) is the period over which your pension growth is measured. Up until 2014/15 the PIP in the LGPS ran from 1 April to 31 March. Special transitional arrangements were introduced in 2015/16 (more on this below) and from 2016/17 the PIP has been aligned with the tax year (that is, from 6 April to 5 April).

Special transitional rules were introduced for 2015/16 meaning that there were two part-year PIPs in 2015/16, as set out below:

First part-year PIP: 1 April 2015 to 8 July 2015 – the standard AA limit during this period was £80,000

Second part-year PIP: 9 July 2015 to 5 April 2016 - the standard AA limit for this period was nil however up to £40,000 of unused allowance from the first part-year PIP can be carried forward into this second part-year PIP.

You will only have a tax charge to pay if your pension savings exceed the AA by more than the amount of unused allowances you can carry forward from the previous three years. You can carry forward unused allowances as long as you have been a member of a registered pension scheme for the relevant previous years.

There are strict rules on how unused allowances from previous years can be applied and how they should be worked out. So we recommend you use HMRC's online carry forward calculator (link below), which will work out your carry forward for you and therefore help you assess whether you have a tax charge to pay.

Please note: If you have exceeded the AA in one of the previous three tax years, you will need to input into the calculator details of all your pension savings starting with the year that was three years before the first year that you exceeded. For example, if you first exceeded in 2014/15, you will need to input your pension savings from 2011/12 up to the current year in which you have exceeded. Also, remember to input your total pension savings across all your pension arrangements into the calculator.

HMRC online carry forward calculator opens in new window page.

More about carry forward (HMRC online tax manual) opens in new window page.

You will have a tax charge to pay if your pension savings exceed the AA by more than the amount of unused allowances you can carry forward from the previous three years.

If this applies to you, you must calculate your AA tax charge based on your highest marginal rate. We cannot do this for you. Step by step instructions on how to calculate the charge are available from HMRC opens in new window .

It is also your responsibility to report your tax charge to HMRC. Find out how to report your tax charge to HMRC.

If you are unsure you should seek qualified advice from your own independent financial advisor who has knowledge of the LGPS. For help in choosing an independent financial advisor visit the Money Advice Service - Choosing a financial adviser opens in new window

If you exceed the AA limit in any year and have a tax charge to pay you are responsible for reporting this to HMRC on your Self Assessment tax return. You will need to complete the Additional Information pages of the tax return to show the amount by which your total pension input amount exceeds the annual allowance. The boxes that need to be completed for the annual allowance are in the ‘Pensions savings tax charges’ section (on the additional information pages (SA101) in the paper return).

Completion of the Additional information SA101 –information you will need

Pension Savings Tax Charges

Box 10 Amount saved towards your pension, in the period covered by this tax return, in excess of the Annual Allowance
Enter the amount of your pension savings over your annual allowance. For example, if the amount of your pension savings is £50,000 of which £10,000 is over your annual allowance enter £10,000 in box 10. Remember you can use any unused allowance from the previous 3 years

Box 11 Annual Allowance tax paid or payable by your pension scheme.
Enter the amount of your annual allowance charge that has or will be paid by SYPA. If your tax charge is over £2000, SYPA can pay the Tax charge on your behalf for a permanent reduction to your pension. Please refer to Scheme pays section of our website.

Box 12 Pension scheme tax reference number
SYPA PSTRN is 00329711RN


Further information to help complete this part of the tax return can be found at GOV.UK - Pension savings - tax charges on any excess over the lifetime allowance and the annual allowance opens in new window If you've never completed a tax return (or it's been some time since you did), you will need to complete a registration form at least 20 days before the deadline to let HMRC know what's changed and to get a tax return.

The deadline for submitting online tax returns is 31 January after the year in which the tax charge has arisen (or 31 October for paper returns).

HMRC Pensions Tax Manual – further information on reporting a tax charge to HMRC opens in new window

If you exceed the AA limit but do not have a tax charge to pay (because you have enough carry forward to wipe out the amount by which you exceeded), there is no further action required and you do not need to report anything to HMRC.

If you have an AA tax charge that is less than £2,000 you must pay the charge direct to HMRC via your Self Assessment tax return by 31 January following the year in which your tax charge arose. (See Reporting the tax charge).

If your tax charge is more than £2,000, and providing certain conditions are met, you may be able to elect for SYPA to pay some or all of your tax charge on your behalf and in return we would reduce your LGPS pension accordingly. This is called the Scheme Pays facility.

Providing certain conditions are met, you can ask us to pay some or all of your annual allowance tax charge on your behalf in return for a permanent reduction to your LGPS pension.

Not affected by Tapered AA

  To be able to use this facility, you must make sure that certain conditions are met. Please check that you meet these conditions before you make an election to use Scheme Pays.

  The reduction that we apply to your pension is determined by a set of prescribed factors. These factors vary depending on your age, gender and how close to retirement you are.

  The reduction (called your 'scheme pays pension debit') will increase each year in line with inflation. When you come to retire, the pension debit will be adjusted to reflect the date your pension comes into payment. If you retire before or after your Normal Pension Age, the pension debit will be reduced or increased accordingly.

  Scheme pays pension debits are not applied to contingent survivor benefits and other death related benefits.

  If you would like to use the Scheme Pays facility, please direct your queries to Support for a quote. Please ensure you tell us how much of your annual allowance charge you want us to pay and the tax year in which the annual allowance charge occurred. We will send you a blank election form (P800) with the quote for you to complete should you wish to go ahead with the election.

  Assuming that you are not affected by the Tapered AA, your Scheme Pays election will be made on a mandatory basis. This means that once we receive your signed election form (P800), the election is irrevocable and SYPA are jointly and severally liable with you for the annual allowance charge. This means you cannot change your mind once you return your completed form to us, but you do have up to 4 years to change the tax charge amount, if required

Affected by Tapered AA

  To be able to use this facility, you must make sure that certain conditions are met. Please check that you meet these conditions before you make an election to use Scheme Pays.

  SYPA can only pay the element of your tax charge that is in respect of the 'standard AA' to HMRC on your behalf on a mandatory basis. We can, however, pay the element of your tax charge that is in respect of the tapered AA on a voluntary basis.

  If you would like to use the Scheme Pays facility on a voluntary basis, you must first read the Important Information on the implications of the timing of payment of your tax charge.

  Alternatively, if you do not wish to use Scheme Pays on a voluntary basis, you may wish to pay this element of your tax charge direct to HMRC. In this case, you can still use our Scheme Pays facility to pay the rest of your tax charge on a mandatory basis.

  There is more information available on HMRC's online tax manual opens in new window . to explain which element of your tax charge can be paid on a mandatory basis where you are affected by the Tapered AA. You may wish for us to pay your entire tax charge on your behalf, but the remainder would need to be paid on a voluntary basis. You will need to work out for yourself how much of your tax charge can be paid on a mandatory and how much on a voluntary basis. We will need to know this if you wish to use the Scheme Pays facility.

  If you would like to use the Scheme Pays facility, please direct your queries to Support for a quote. Please ensure you tell us how much of your annual allowance charge you want us to pay on a mandatory basis and how much (if any) on a voluntary basis, as well as the tax year in which the annual allowance charge occurred. We will send you a blank election form with the quote for you to complete should you wish to go ahead with the election.

Retiring


If you are about to retire, please be aware that you cannot elect to use Scheme Pays on a mandatory basis once we start to pay you your LGPS pension benefits.

Therefore, if you think you may have an annual allowance tax charge to pay, please consider whether you wish to use the mandatory Scheme Pays facility before you return your retirement paperwork to us.

Please note: if you instruct us to pay a tax charge using the scheme pays facility, you cannot later change your mind. But you do have some time to change the amount of the tax charge you want us to pay.

From the tax year 2016/17 onwards, the A A is tapered for high earning individuals. The AA will be reduced if your ‘Threshold Income’ and ‘Adjusted Income’ exceed the limits in a year. For every £2 that your Adjusted Income exceeds the limit, your A A is tapered down by £1. Your A A cannot be reduced below the minimum that applies. The limits changed from the 2020/21 year.

Tapered annual allowance limits from the 2020/21 year

Definition Limit 2016/17 to 2019/20 Limit 2020/21 onwards AA
Threshold Income Boadly your taxable income after the deduction of your pension contributions (includin AVCs deduction under the net pay arrangement) £110,000 £200,000
Adjusted Income Broadly your threhold income plus pensions savings built up over the tax year £150,000 £240,000
Minimum AA If your AA is tapered, the minimum AA that can apply £10,000 £4,000


Threshold income includes income from all sources that is taxable eg property income, savings income, dividend income, pension income, social security income (where taxable), state pension income etc.

You are not allowed to deduct from taxable income any amount of employment income given up for pension provision as a result of any salary sacrifice made on or after 9 July 2015.

The tapered AA from 2020/21 onwards

Adjusted Income Annual Allowance
£240,000 or below £40,000
£250,000 £35,000
£260,000 £30,000
£270,000 £25,000
£280,000 £20,000
£290,000 £15,000
£300,000 £10,000
£32,000 or below £4,000


The taper AA from 2016/17 to 2019/20

Adjusted Income Annual Allowance
£150,000 or below £40,000
£160,000 £35,000
£170,000 £30,000
£180,000 £25,000
£190,000 £20,000
£200,000 £15,000
£210,000 £10,000

HMRC’s guide opens in new window

If you have elected to transfer pension rights from another scheme into the LGPS, the value of the benefits relating to the transfer does not count towards your pension savings in the LGPS in the year in which the transfer payment is received.

If you are transferring from a Club scheme we will ignore the effect of any actuarial adjustments for AA purposes but will include the effect of any salary increase and revaluation.

If you are transferring between LGPS funds or within SYPA, please be aware that if you are transferring final salary benefits (that is, from pre 1 April 2014 membership), and have had an increase in pay from your previous employment, the growth in your pension due to the increase in pay will be taken into account in the calculation of your pension savings.

AVCs are one of the ways in which you can top up your LGPS benefits.

If you are paying AVCs, these contributions are included in the calculation of your pension savings in addition to the pension savings in respect of your main scheme benefits. If you are paying AVCs into one of our in-house arrangements (excluding life cover), these contributions will be included in the pension savings that we calculate for you.

Therefore if you pay AVCs to an external provider or are thinking about starting to pay AVCs or increasing your current contributions, please be aware of how this will affect your total pension savings and consider whether this may lead to you exceeding the AA.

If you have flexibly accessed benefits in a money purchase (or 'defined contribution') arrangement on or after 6 April 2015, you will have triggered the Money Purchase AA. If this applies to you and you are currently paying AVCs please be aware that your annual allowance may be affected.

Over time there have been various ways of buying extra benefits directly from SYPA by making regular deductions from your pay:

Added years (sometimes called buying extra membership) – this ran up to 1 April 2008 Buying extra pension – this was called ARCs from 1 April 2008 to 31 March 2014, then became APCs from 1 April 2014

If any of these apply to you, then their value will be included within the pension figures used to work out the growth in your pension.

If you have made a one off payment to buy some extra pension, then the pension savings for that year will include the full amount bought during the PIP.

Therefore, if you are thinking about buying extra pension or your employer has given you some extra pension, please be aware of how this will affect your LGPS pension savings and consider whether this may lead to you exceeding the AA.

If you retire on ill health grounds with a Tier 1 or Tier 2 you may be affected by the AA. This is because the enhancement you get with a Tier 1 or Tier 2 ill health retirement can mean a significant increase in your benefits.

But some members are protected from the AA rules if they meet HMRC's severe ill health criteria.

Please note: once you have retired you are no longer eligible to use our 'Scheme Pays' facility on a mandatory basis. Therefore, if you have an AA tax charge payable as a result of the increase to your benefits due to your ill health enhancement and would like to use 'scheme pays', you need to make sure you elect for this facility before you return your retirement paperwork to us.


Lifetime Allowance


The lifetime allowance is the total amount that you can build up from all your pension savings in your lifetime without incurring a tax charge.

This includes:

  1. Your benefits in the Local Government Pension Scheme (LGPS), and
  2. Any pension benefits you may have in other tax-registered pension arrangements.
But it does not include:
  1. State pensions and dependant's pensions.
The table below shows the standard lifetime allowance amount:
The lifetime allowance amounts for the current and previous years.
Tax year Lifetime allowance
2011/12 £1.8 million
2012/13 £1.5 million
2013/14 £1.5 million
2014/15 £1.25 million
2015/16 £1.25 million
2016/17 £1 million
2017/18 £1 million
2018/19 £1.3 million

From 2018/19 the lifetime allowance will be increased in line with inflation.

Most people aren't affected by the lifetime allowance, however if you have long membership and high earnings, you may be at risk of exceeding the lifetime allowance when you retire.

You can check if you are close to or exceed the lifetime allowance limit with your SYPA benefits by looking at the annual benefit statement we send you for the details of the pension and lump sum (if applicable) you have earned to 31 March and estimated to your normal pension age.

The lifetime allowance is tested against the pension and lump sum amounts you are going to receive including any added years or extra pension that you have bought.

To work out the capital value of your benefits use the method below:

For pensions that start to be drawn on or after 6 April 2006...

Pension x 20 plus Lump Sum plus AVCs

The figure you get is called the capital value of your benefits.

For pensions already in payment before 6 April 2006.

In this case you ignore your lump sum, and just multiply the yearly figure (including any pensions increase) by 25.

Remember to include all pension benefits from other schemes too in your calculations!

HMRC information on lifetime allowance calculations opens in new window

If you exceed the lifetime allowance you will have to pay an additional tax charge on the excess. You will be given options at the point of retirement/drawing your benefits about how the charge will be paid. This will be in the form of a reduction to your annual pension. The amount of the reduction depends on the amount by which you exceed the lifetime allowance, your gender and your age at retirement.

You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.

As long as you meet their criteria, you can apply to HMRC for one of two protections. These are known as fixed protection 2016 and individual protection 2016.

You may have already protected your benefits and you can find further information about existing protections in the HMRC Pensions Tax Manual opens in new window

If you think you will exceed the lifetime allowance there are certain considerations that you may wish to take into account:

50/50 option

If you wish to slow down your pension build up, the 50/50 section of the LGPS allows you to pay half your normal contributions and build up half your normal pension whilst still retaining full life and ill health cover.

Opting out

If you opt out of the LGPS with the right to a deferred benefit you will not be able to aggregate your benefits should you re-join the LGPS at a later date.

If the value of your benefits exceeds the lifetime allowance when you are due to retire we will write out to you. We will provide you with the option of:

  1. standard retirement benefits; and
  2. maximum lump sum benefits.
You are allowed to draw up to 25% of the total value of your pension benefits, or 25% of your remaining standard lifetime allowance, if this is lower. If you have a protected lifetime allowance, you can draw up to 25% of the value of your protected lifetime allowance.

If the option you choose results in a tax charge we will pay the tax charge to HMRC and make a permanent reduction to your annual pension.

The reduction to your annual pension is calculated by dividing the lifetime allowance tax charge by a factor provided by the Government Actuary's Department (GAD). The factor used will be based on your gender and on your age at retirement.