Paying into a pension arrangement, which is approved by HM Revenue & Customs (HMRC), such as the Plan, allows you to benefit from certain tax efficiencies as you save for your retirement.
However, HMRC sets limits on how much you can save in a registered pension arrangement each tax year without incurring tax charges, as well as a limit on the total amount of lump sums that you (or your beneficiaries, on your death) can take tax-free from all your pension arrangements. These limits are called the Annual Allowance, the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
Annual Allowance (AA)
For most people, their AA will be £60,000. However, if you are a high earner (e.g., with total taxable earnings above £260,000 a year), your AA could be reduced to a minimum of £10,000.
If you have already flexibly accessed benefits from a defined contribution (DC) arrangement, a Money Purchase Annual Allowance (MPAA) of £10,000 could apply.
Any pension savings over the AA will attract a tax charge. Most people will not exceed the AA, but it is important that you understand how your AA is calculated so that you can avoid paying a tax charge.
You can read more about the AA on the HMRC website at: https://www.gov.uk/tax-on-your-private-pension/annual-allowance - This link opens in a new browser window
Pension Savings Statements
The pensions team issues pension savings statements in the Autumn to members who have saved more than the standard AA.
The pensions team will also issue a Money Purchase Pensions Saving Statement to anyone who has told the Plan that they are affected by the MPAA. If you have been issued with a certificate confirming that you are now affected by the MPAA, please tell us by uploading a copy of the certificate here so that we can issue you with a Money Purchase Pensions Saving Statement each year.
You can read more about the pension savings statement on our website at: https://www.pearson-pensions.com/pension-savings-statement/
Need more help?
WEALTH at work
We have appointed WEALTH at work, leading independent financial guidance specialists, to operate a free dedicated telephone helpline to answer any questions you may have about your pension savings statement.
This call will provide you with guidance and help you decide if you may have incurred an Annual Allowance tax charge, however this cannot be constituted as advice. WEALTH at work are able to provide you with personal financial advice but you will be charged.
Call 0800 0931462 to speak to a member of the WEALTH at work guidance team.
HMRC website
HMRC have created a pension savings AA calculator to help you work out your AA and whether you have a tax charge.
The calculator will work out:
- your available AA (including any Carry Forward amount)
- your available (MPAA (if applicable to you)
- the amount of your pension savings on which tax is due (if applicable)
- Your unused AA from previous tax years (if applicable).
You can access the HMRC AA calculator at: https://www.tax.service.gov.uk/pension-annual- allowance-calculator - This link opens in a new browser window
Lump Sum Allowance (LSA)
The Lump Sum Allowance (LSA) applies to the tax-free lump sum that you can take at retirement from the Plan. The LSA does not apply to any trivial commutation lump sum or small lump sums that you may be eligible to take from the Plan at retirement (however you must have some LSA available to be able to take a trivial commutation lump sum).
The standard LSA has been set at £268,275 (although a higher LSA amount may apply where members have a relevant tax protection) and is the maximum amount that can be taken as tax-free sums from all pension arrangements.
If you have used up all your LSA or your lump sum is more than the LSA when combined with your other tax-free lump sum benefits, the excess will be paid via payroll and will be taxed at your marginal rate.
Lump Sum and Death Benefit Allowance (LSDBA)
The Lump Sum and Death Benefit Allowance (LSDBA) limits the total amount of tax-free lump sums paid to or in respect of an individual across all pension arrangements. The standard LSDBA has been set at £1,073,100 (although a higher LSDBA amount may apply where members have a relevant tax protection) and the following lump sums payable from the Plan are tested against the LSDBA:
- Pension commencement lump sums (tax-free lump sum)
- Uncrystallised funds lump sum death benefits.
- Serious ill-health lump sums
- Defined benefit lump sum death benefits
The following lump sums payable from the Plan are not tested against the LSDBA:
- A small lump sum
- A trivial commutation lump sum
- A trivial commutation lump sum death benefit.
Overseas transfer allowance (OTA)
From 6 April 2024, amounts transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) are tested against the overseas transfer allowance (OTA). The OTA is set at the same level as the individual’s LSDBA.
Where individuals have crystallised pension benefits prior to 6 April 2024 (including as a result of a transfer to a QROPS), their available OTA is reduced by an amount equal to 100% of the value of their LTA used as at 6 April 2024.
Where the value of the benefits being transferred exceed the OTA, they will be subject to the overseas transfer charge (OTC) of 25% of the value of the amount transferred in excess of the OTA. The 25% charge only applies once to the benefits being transferred.
