There are limits on the pension savings you can make before you become subject to a tax charge (over and above any tax due under the PAYE system). These limits are known as the Annual Allowance and the Lifetime Allowance.
Annual Allowance (standard rules)
The Annual Allowance is the amount by which your pension savings can increase in one year without becoming subject to a tax charge. As of 6 April 2021 the Annual Allowance limit is £40,000. In addition, from 6 April 2016 a tapered Annual Allowance applies to high earners. The thresholds for the calculation of the tapered Annual Allowance were amended in the Budget of 3 March 2021, and are effective from 6 April 2021. If you have a taxable income below £200,000, you will retain the Annual Allowance of £40,000. If you exceed this level of income you will have an ‘adjusted income’ calculated for the year and your Annual Allowance will be reduced by 50p for each £1 of adjusted income in excess of £240,000.
The formula to calculate the value of pension savings in the Scheme is:
- [Pension Value at Year End – (Pension Value at Start of Year x CPI Increase)] x 16, plus
- lump sum at year end – (Lump sum at start of year x CPI Increase), plus
- The amount of any AVC contributions made over the year
The CPI increase used is the increase in CPI over the 12 months to the September before the start of the tax year. The figure for 2021/22 is 0.5%.
NILGOSC has a duty to notify you by 6 October of each year if you exceed the Annual Allowance for the previous tax year. A pensions savings statement will be issued to you if you exceed the Annual Allowance.
If your pension savings exceed the Annual Allowance, you may carry forward any unused allowance from three previous tax years. If you still exceed the allowances after carried forward allowances are taken into account, a tax charge must be applied. If the tax charge exceeds £2,000 it can be paid from your pension benefits and your benefits will be adjusted; this is known as Mandatory Scheme Pays. NILGOSC may also consider paying a tax charge between £1,000 – £1,999, if certain conditions are met. This is known as Voluntary Scheme Pays. Please contact the Pensions Development team if you want more information on this facility.
Special Annual Allowance rules will apply if you have taken any flexible access benefits from a money purchase (defined contribution) arrangement. Flexible access benefits includes taking your money purchase benefits entirely as cash.
If you have elected to transfer pension rights from another scheme into the LGPS (NI), the value of the benefits relating to the transfer does not count towards your Annual Allowance pension saving in the LGPS (NI) in the year in which the transfer payment is received, except if it is a transfer under Club transfer rules (this is usually a transfer from another public service pension scheme).
Further information regarding the Annual Allowance can be found in the Annual Allowance Factsheet (*PDF, 503KB)
The Lifetime Allowance is the total capital value of all your pension arrangements which you can build up during your lifetime without paying extra tax.
Calculate the capital value of your pension benefits using our online calculator
The capital value of your pension benefits is generally calculated as:
- (Pension x 20) + Lump sum + value of AVC fund (if any)
If the value of your benefits when you draw them (not including any state retirement pension, state pension credit or any spouse’s, civil partner’s or dependant’s pension you may be entitled to) exceeds your Lifetime Allowance, a tax charge will be made against the excess. The Lifetime Allowance for 2021/22 is £1,073,100.
If you are close to the Annual or Lifetime Allowance limits it is recommended that you seek specialist tax advice.
Further details on the Lifetime Allowance can be found in our Lifetime Allowance Factsheet (*PDF, 329kb).
Who do I contact for advice?
If you think that you may be affected by any of the tax limits you should contact your own tax adviser or an Independent Financial Adviser. NILGOSC staff are not permitted to give advice, but if you have any queries in relation to the calculations or procedures please contact our office for assistance.
If you are considering opting out of the Scheme you may find it helpful to read the following information: Opting Out
How can I find out more?
For more information on the tax rules on pension savings you should refer to the HMRC website: Tax on your private pension