Allowances

Click here to find out about the changes to SIPP regulations.

 

It is important to remember that the Annual Allowance and the Lifetime Allowance apply to all your pension arrangements.

 

Annual allowance

Lifetime allowance

Carry forward

 

You can contribute as much as you want to your pension. However, only applies to contributions up to the relevant Annual allowance limit, and may be restricted in accordance with new regulations for .

Personal tax relief is available up to 100% of earnings or the limits listed below, whichever is the lower:

 

Tax year	Annual allowance
2011/12	£50,000

 

The Annual allowance is reduced by any contributions made on your behalf by an employer or third party.
Any contributions above the annual allowance will be subject to a higher (40%) or additional (50%) income tax charge.

 

Lifetime allowance

 

The Lifetime allowance (LTA) sets a ceiling on the total value of pension funds that an individual can accumulate without a tax penalty. When an individual takes benefits, the aggregate value of all their pension funds is tested against the LTA, which has been set at:

 

Tax year	Lifetime allowance
2011/12	£1.80 million

 

The £1.8 million limit is being reduced to £1.5m from 2012/13

 

Any funds over the LTA are subject to a “recovery charge” of:

• 55% tax where the excess is taken as a cash lump sum
• 25% tax where taken as income.

 

Any income taken is then also subject to income tax at your highest marginal rate.

 

Revised lifetime allowance limits apply for those with a large pension fund who obtained what’s known as “‘Primary and/or Enhanced Protection’by registering with HMRC.

 

Carry Forward

 

From 2011/12, unused annual allowances from the three preceding tax years can sometimes be carried forward to the current tax year.

Where no pension provision has been made, this permits a potential £200,000 to be contributed in the current tax year, the maximum 2011/12 allowance plus – 2008/09, 2009/10 and 2010/11.

 

This rule helps people who;

• Are higher earners and have more disposable income
• Have received a large bonus or windfall
• Have highly variable income patterns
• Wish to maximise their pension provision
• Have a large tax bill due in the current year
• Have sufficient headroom below the Lifetime Allowance

Key Operational points are:

• The current year’s full allowance must be used before carry forward can be used
• Unused annual allowance is used up starting with the earliest year first (2008/09).
• The individual has to have been an active member of a registered pension scheme at some point during the carry forward year in question, although there is no need for any contributions to have been made to the scheme in that year.
• For each year the annual allowance is limited to the lower of;

1. total income or £50,000, or
2. £3600

• Where contributions already paid in any one of the carry forward years is greater than £50,000 these may cancel out some or all of another year’s allowance - see Example. 
  
  

Defined benefit schemes use a complex valuation factor for converting benefit entitlement into contribution equivalent which is not covered here. 

Example
Graham earns £200,000 a year and has already paid £50,000 to his SIPP to use up his annual allowance for the tax year 2011/12. He would like to make a further pension contribution to use up unused annual allowances from previous years.

Graham's history of pension funding in his SIPP for the last three tax years and his carry forward calculation follows:

Tax year	Annual Allowance for Carry Forward	Amount contributed in year	Unused allowance	Cumulative carry forward available
2008/09	£50,000	£35,000	£15,000	£15,000
2009/10	£50,000	£60,000	-£10,000	£5,000
2010/11	£50,000	£45,000	£5,000	£10,000

The key point to note is that, because Graham's contributions for 2009/10 were more than £50,000, this has used up £10,000 of his unused allowance from the previous year.

The result is that on top of his standard £50,000 annual allowance, Graham could pay up to another £10,000 for 2011/12 allowing him to obtain income tax relief on £60,000.

 

Tax benefits of pensions

Pension Contributions