The Government wants to encourage individuals to save for retirement so there are tax reliefs available.
What is the Annual Allowance?
The Annual Allowance is a limit on the total pension savings you can build up in UK registered pensions schemes each year without incurring a tax charge. The Annual Allowance is currently capped at £40,000, although a lower limit may apply if you have already taken benefits from a money purchase pension arrangement or if your earnings are above a certain threshold. The Annual Allowance applies across all the pension schemes you belong to, it’s not a ‘per scheme’ limit. You can carry forward unused Annual Allowance from the previous three tax years.
If you exceed the Allowance
If you exceed the Annual Allowance in a year, you may have to pay an Annual Allowance Charge.
The value of your pension savings built up over the previous year for testing against the Annual Allowance are shown on your annual benefit statement. If you think that you may be getting close to your Annual Allowance, or may have exceeded it, you may wish to consider taking advice from an independent financial adviser.
There is no limit to the value of benefits you can build up in your pension funds. However, you may be liable to pay a tax charge if the value of your total pension benefits exceeds the Lifetime Allowance as set by the Government. The Lifetime Allowance is currently £1,073,100 (2020/2021), unless you have applied for any form of Lifetime Allowance protection from HMRC that entitles you to a higher amount.