Contribution Limits for Pensions

Before the A-day changes were made, you were only permitted to contribute a certain percentage of your final salary to your pension, and there was a limit to the amount you could get tax relief on. However, since 6 April 2006, you can now contribute as much as you want into any number of pension schemes (occupational and/or personal) each year, and there is no upper limit to the total amount of pension saving you can build up. In fact, you could contribute all your salary to your pension scheme if you wish!

However, although there is no limit on the amount of pension saving you can build up in a pension scheme, there is a limit on the tax relief given on the amount paid into your pension scheme. The maximum tax relief you can receive each year will be 100% of your earnings, but subject to an annual allowance and a lifetime allowance. If you have few or no earnings, you can receive tax relief on up to £3,600 a year.

Annual Allowance (AA)

Pension savings are subject to an annual allowance, above which contributions will be taxed at 40%. An allowance of £215,000 a year was set in 2006/2007, which rose to £255,000 in the 2010/2011 tax year. This amount will be frozen until 2015/16, and then the amount will be reviewed every 5 years.

The annual allowance applies to the increase in the pension fund and includes contributions made by you and your employer. If the annual allowance is exceeded, then the extra pension savings must be declared and the annual allowance charge (40%) paid through Self-Assessment.

The annual allowance charge does not apply in the year you take all your benefits.

Lifetime Allowance (LTA)

Pension savings are also subject to a maximum lifetime allowance on the value of your pension fund, above which will be taxed by the new Lifetime Allowance Charge (Recovery Tax). If you take benefits above your lifetime allowance as a pension, the Lifetime Allowance Charge on the excess amount will be 25%. If you take benefits above your lifetime allowance as a lump sum, the charge will be 55%. This charge will apply in addition to the usual Income Tax due on pension payments.

When first introduced, the lifetime allowance stood at £1.5 million, which increased to £1.8 million in 2010/11. Like the annual allowance, this figure will be frozen until 2015/16, and then reviewed every 5 years. This figure not only includes the amounts paid in, but also all the interest or investment growth that has built up.

The lifetime allowance 'test' takes place when benefits are first drawn, or when you reach age 75.