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 a limit on how much you can save in a registered pension arrangement each tax year without incurring a tax charge. This is called the Annual Allowance.
However, HMRC sets a limit on how much you can save in a registered pension arrangement each tax year without incurring a tax charge, as well as a limit on the total amount you can have in all your pension arrangements. These limits are called the Annual Allowance and the Lifetime Allowance.
Annual Allowance (AA)
Any pension savings over the AA attract a tax charge
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 p.a.), 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.
Most people will not have exceeded the AA, but it is important that you understand how your AA is calculated so 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, which is £60,000 for 2023/24.
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 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
Lifetime Allowance (LTA)
When you take your benefits from any pension arrangement, they are checked against the LTA. Your Plan benefit statement shows the percentage of the LTA that your benefits in the Plan currently represent.
The LTA for the 2023/24 tax year is £1.073 million. If your pension savings are higher than this, then you can take the excess as either a lump sum or additional pension and it will be taxed as income at your marginal rate.
If your pension at retirement, from all sources, exceeds the LTA in force at that time, it will be restricted to the LTA under the Rules of the Plan, unless you request otherwise.
You can read more about the LTA on the HMRC website at: https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance - This link opens in a new browser window.