What is Annual Allowance and am I likely to be affected?
Annual Allowance (AA) is the amount by which the value of your pension benefits can increase by in any one tax year without you having to pay a tax charge.
The AA limit is currently £40,000. Most members will not be affected by Annual Allowance because the value of their pension savings will not increase by more than £40,000 in a tax year. If they do increase by more than £40,000, the member is likely to have an unused amount of Annual Allowance from previous years that can be carried forward.
You are most likely to be affected if:
- you have membership of the LGPS that was built up in the final salary section and you receive a significant pay increase
- you transferred in membership from another public service pension scheme in the past which retains a final salary link and you receive a significant pay increase
- you pay a high level of additional contributions
- you are a higher earner
- you transfer pension rights into the LGPS from a previous public service pension scheme under the preferential club transfer rules and your salary (full time equivalent) on joining the LGPS is higher than the salary you earned when you left the previous scheme
- 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 salary (full time equivalent) has increased significantly since leaving the scheme
- you have accessed flexible benefits on or after 6 April 2015.
How is your Annual Allowance calculated?
Your AA is calculated by seeing how much the value of your pension has grown from one tax year to the next. (A tax year runs from 6th April to 5th April).
(Annual Pension value from previous tax year (*plus inflation) - Annual Pension value from current tax year) x 16
Lump Sum value from previous tax year (*plus inflation) - Lump Sum value from current tax year
Cash Value of all AVCs made during the current tax year = Annual Allowance used
What if I exceed the Annual Allowance?
The Clwyd Pension Fund will inform you if your LGPS pension savings exceed the AA limit in any year by no later than 6th October of the following year.
Carry forward from previous years
You would only be subject to a tax charge if the value of your total pension savings increases by more than the AA for that year.
However, you are allowed to carry forward unused AA from the previous three years. This means that even if the value of your pension savings increases by more than the AA in a year, you may not be liable for an AA tax charge.
For example, if the value of your pension savings in 2019/2020 increased by £50,000 (i.e. by £10,000 more than the AA) but in the three previous years it had only increased by £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of the AA would offset the £10,000 excess pension saving in the current year. There would be no AA tax charge to pay in this case.
|Year||AA Used||AA Limit||AA left||AA left after carry forward used|
To carry forward unused AA from an earlier year you must have been a member of a tax registered pension scheme in that year.
If you would like to check your AA yourself, you can use the AA Quick Check Tool which can be found here but please read the instructions page first before using the Quick Check Tool.
Tapered Annual Allowance
Since the tax year 2016/2017, the AA has been tapered for high earning individuals. Your 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 AA is tapered down by £1. Your AA cannot be reduced below the minimum that applies.
If you feel you may be affected by Tapered Annual Allowance or just want some more in-depth information about AA, please contact the Clwyd Pension Fund and we can email or post a factsheet to you.