Pension Tax Relief Limits
Members of UK pension schemes qualify for tax relief as follows:
However, pension benefits which qualify for tax relief are restricted to 2 maximum allowance permitted by HM Revenue & Customs (HMRC).
The Annual Allowance (AA) is the total annual limit for the purpose of limiting tax relief and is expressed as a capital value. It measures the increase in the value of pension benefits over a 12 month period, called a Pension Input Period (PIP). The AA effective from 1st April 2014 is £40,000 (reduced from £50,000). Any excess value accrued over the AA limit may be subject to tax at your highest marginal rate. Members who could be potentially impacted by the AA are those who are middle to high earners, particularly those with long service in the scheme, and may be currently paying a high level of Money Purchase AVCs. Those members whose value exceeds the AA, are provided with a Pension Savings Statement (PSS) for the year(s) when the AA is exceeded. Further information about these statements is available here.
The Lifetime Allowance (AA) is the maximum amount of tax relieved pension savings you can build up over a lifetime before any tax penalties apply. You can build up benefits in excess of the limit but benefits over the limit will be subject to a tax recovery charge (currently 25% of pension or 55% if taken as cash). The LTA effective from 1st April 2014 is £1,250,000 (reduced from £1,500,000). Due to the reductions in the LTA, two methods of benefit protection were introduced by HMRC. These transitional protections allow pension scheme members to apply to retain the higher LTA value.
The first of the two protections was Fixed Protection 2014 (FP2014) for which applications using the HMRC Form APSS228 had to be received by HMRC’ deadline of 5th April 2014. The features of FP2014 are:
The remaining protection available is Individual Protection 2014 (IP2014). Its features are:
It is possible for individuals to apply for both FP2014 and IP2014 although you can't apply for them at the same time, with FP2014 taking precedence. In the event that a pension saver loses FP2014 as a result of future benefit accrual, they can fall back on IP2014. Where both FP2014 and IP2014 are granted, IP2014 will remain dormant and will only become active if FP2014 is lost, for example where further pension accrual takes place. By applying for both protections, the individual has the ability to recommence pension accrual in the future should their circumstances change. While they would lose FP2014 (where further benefit accrual takes place) they would still maintain an LTA up to a maximum of £1.5m due to having IP2014.
HMRC has a Lifetime Allowance Checking Tool to help you decide whether you should apply for either or both of the 2014 transitional protections.
Things to consider – potential actions for affected employees
Could you be affected by the reduced Lifetime Allowance?
40 years, LTA £1.8m = £146,521 pensionable salary
40 years, LTA £1.5m = £130,434 pensionable salary
40 years, LTA £1.25m = £108,695 pensionable salary
Mitigation of pension tax charges
For the Annual Allowance (AA), HMRC allows “Carry Forward”. This is the mechanism where an individual can carry forward unused annual allowance from three prior years.
For the Lifetime Allowance (LTA), individuals can make use of the above protections for 2014.
Notifying HMRC of a charge payable
This is done via the Self Assessment Tax Return (SATR), the relevant form is the SA101 Additional Information Form, where you provide the amount by which your pension savings exceed the AA value, and on the same form, information on AA tax payable by the pension scheme.
You do not need to make any claim to HMRC to carry forward unused AA amounts, nor do you need to show this on the SATR if your unused allowance means that an AA excess tax charge is not due.
An individual can request that the pension scheme, subject to conditions pays the charge on their behalf and reduce their benefits accordingly. This is known as “Scheme Pays”. An individual must notify the pension scheme that they wish to use “Scheme Pays” by the 31st July in the year following the tax year in which the Annual Allowance charge arose.
For the tax year 2011/12, the time limit to was extended to 31 December 2013
For the tax year 2012/13, the time limit was 31 July 2014
For the tax year 2014/15 the time limit is 31 July 2015
For the tax year 2015/16 the time limit is 31 July 2016
Information for USS members only
USS pensionable salary definition
This is used in AA and LTA calculations. It is important to be aware of this as it may be significantly higher than your current level of salary due to the link to RPI over the prior 13 years. This is defined by USS as:
“This is your highest average salary worked out to a formula designed to give you the best possible calculation – “smoothing out” any adverse ups and downs in your salary over the years, and making adjustments for price inflation.
This is how it works: we determine your salary for each period of 12 months that you have been a USS member, over a maximum time of 13 years previous to the date on which your pensionable salary is to be calculated, and revalue each salary, except the last 12 months, using the Retail Prices Index measure of inflation.
Your pensionable salary is whatever comes out best either the highest revalued annual salary during the last three years or your highest revalued salary averaged across any three consecutive “best years” over the last 13 years”.
This explains how the AA and LTA limits changed from April 2014. It provides an indication of who might be affected by these changes and what actions you may be able to take in order to mitigate/reduce any tax charges. It lasts approx 30 minutes and you should be able to stream through any computer, tablet or smartphone.
There is an online modeller which will produce an estimated LTA figure based on your latest salary as held on the USS database (currently 31/03/13, until the 31/03/14 renewal is processed). To login you will need your National Insurance number and USS member number as found on your USS annual Service Statement. You can also over-write the result with a more up to date salary figure which will give you a more accurate indication, by clicking on the 'Your details' section. Please note you also need to consider any other non-USS benefits when calculating your overall LTA figure.
USS contact information
If you would like to discuss this matter further, or need any technical help in these matters, USS has the following members of staff listed below who can assist you:
USS 3 tax relief options
These options are specifically designed to help members manage the changes to the system of pensions taxation. There is also a factsheet explaining what you need to do if your Annual Allowance exceeds the AA limit in any PIP.
Information for NHS Pension Scheme members only
NHS pensionable pay definition
The best year’s pensionable pay in the last three years of pensionable employment. UCL Pension Services provides this information to NHS Pensions .
Should you require an LTA valuation at 5th April 2014, requests can be made using the NHS Pensions Form AW295.. You need to complete, sign and date Part A. Your SD number can be found on any NHS Pension correspondence you may have. If you cannot locate it, please ensure you provide your UCL Payroll number. This is shown as your EE no on your UCL payslip. All forms (all pages) need to be sent to UCL Pension Services who will complete Part B for submission to NHS Pensions.
Electing IP2014 and retirement in 2014
IP2014 is available for those with a pension value in excess of £1.25 million as at 5 April 2014, and gives the individual a personal lifetime allowance based upon this value (subject to a cap of £1.5 million). However, as outlined above, the application Form APSS240 will not be available on the HMRC website until 18th August 2014.
This clearly causes issues for those who would wish to rely on IP2014 yet will retire before or soon after the application forms are available. HMRC has offered a number of suggested methods for dealing with this issue, and although none of them are ideal, the trustee company has decided that the most practicable way forward is to pay benefits as if no protection is in place and make a retrospective adjustment should you subsequently be successful in applying for IP2014. The precise details of how the adjustment will affect benefits is currently being considered, and as soon as it has been finalised, the information will be circulated and made available on this page.
This is available at the following websites. These are constantly updated with information as it become available. You are encouraged to visit these pages frequently to ensure your knowledge and awareness of these matters is up to date.
|USS: Tax Considerations||NHS: Tax Information|
|SAUL: Annual Allowance Lifetime Allowance||MRC Tax Regime|
|Essex Pension Fund: Tax and Pensions||Civil Service: Pensions and Tax|
|HMRC: Pension Schemes – tax relief and charges|
It is acknowledged that some aspects of pensions are complex, and you are presented with difficult decisions to make. UCL Pension Services and the pension schemes are able to provide you with information relating to your pension scheme membership and benefits but cannot provide financial advice.
It is the responsibility for an individual to calculate an AA charge and to report it to HMRC as applicable because this is essentially a personal taxation issue.
It is your responsibility to identify if you have breached the annual allowance limit after taking into account any carry forward allowances, taking into account of any pension savings amount from schemes outside of UCL, and to inform HMRC via the SATR.
The information provided on this website must not be construed as UCL providing you with financial advice.
Independent Financial Advice
It is recommended that if you need financial advice, you contact an independent financial adviser. particularly if you anticipate that the value of your benefits including those from non-UCL pension arrangements, if any, will be close to or exceed the reduced Lifetime Allowance limit, or if you have issues related to the Annual Allowance/Pension Input Period. Information about where you can obtain Independent Financial Advice is available here and on your pension scheme’s web.
Values since April 2006
|Tax Year||Annual Allowance||CPI used in AA PIP||Lifetime Allowance|