Following on from Fridays post, a blog post that breaks down your annual and lifetime allowance.
The UK’s annual allowance is currently £40,000. You are usually required to pay tax if the savings in your pension pot exceeds the annual allowance.
You can carry over an unused allowance from previous years if you didn’t use the allowance from the previous 3 tax years.
Different kinds of withdrawals from your pension pot can make your allowance drop. If you take money from any of the following defined contribution schemes your allowance will drop:
· Cash or a short-term annuity from a flexi-access drawdown fund
· Cash from a pension pot (uncrystallised funds pension lump sums)
· More than the limit from a capped drawdown fund
Reduced allowance for high-income earners
Since April 2016, high-income earners have had a tapered annual allowance if the following apply:
· Your threshold income is over £110,000
· Your adjusted income is over £150,000
If you go above the annual allowance
If you exceed the annual allowance you will receive a statement from your pension provider. The HMRC will not tax anyone for going over the annual allowance in a tax year if they have retired and took all of their pension pot funds because of a serious illness, or if the pension earner has died.
If you are required to pay tax on your contributions and the tax charge exceeds £2000, you can ask your pension provider to pay the amount from your pension pot.
You are usually required to pay tax if your pension pots are worth more than a lifetime allowance. The lifetime allowance is currently set at #1 million.
You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. Your pension provider will deduct the tax before you start getting your pension.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:
· 55% if you get it as a lump sum
· 25% if you get it any other way
Contact us for expert advice in pension tax advice