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Tax and my pension

Your pension and tax: the basics

As you receive tax relief on your contributions to the scheme, the Government puts some limits in place on the amount of tax relief you can receive. Two types of limit exist:

 Annual Allowance (AA)
The maximum amount your pension can grow by before a tax charge applies. Please see the tab below for a further explanation of how this applies.

 Lump Sum Allowance (LSA)
This replaces the lifetime allowance. There is a maximum amount of lump sum allowance you can receive before a tax charge applies. Further information is available on the tab below.

Coming soon: Annual Allowance introductory video.

 

For more information on AA or LSA, please click on the corresponding  box below:

Most people will not be affected by the AA tax charge.

You are most likely to be affected if you:

  • Are a higher earner.
  • Have final salary membership in the LGPS, and you receive a significant pay increase.
  • Pay a high level of additional contributions.

The standard AA limit is set by HM Treasury and is currently £60,000. The limit refers to the amount that the value of your pension can increase before tax charges apply. As your pension is a defined benefits scheme and thus expressed as an annual pension (sometimes with an automatic lump sum) it is necessary to use a formula to convert your pension into a single value and then to work out the growth. We do this on your behalf and will let you know if you exceed the limit.

Important: We can only provide you with figures based on the benefits you hold with us. We are unable to determine your overall annual allowance position and thus if any tax charge should apply. If you need support to assess your overall position we suggest you speak with a financial adviser.

 

Calculating the Annual Allowance

The following steps apply:

  • Calculate the opening and closing values of your LGPS pension.
  • Take the closing value and then minus the opening value from the start of the year.

In the LGPS, your annual pension growth is calculated by looking at the value of your pension at the start of the tax year (6 April), which is then adjusted by inflation, and then comparing this to the value of your pension at the end of the tax year (5 April).

 

Calculate the Opening and Closing Value of your pension

Opening Value:

Step One: Calculate your pension accrued at the start of the year.
Step Two: Multiply this value by 16.
Step Three: Add any additional lump sum value.
Step Four: Increase the total value by CPI.

Closing Value:

Step One: Calculate your pension built up by the end of the year.
Step Two: Multiply this value by 16.
Step Three: Add any additional lump sum value.
Step Four: Add any Additional Voluntary Contributions paid.

If the value of your pension benefits at the end of the year minus the value of your pension benefits at the start of the year is more than the AA, then you may have to pay a tax charge.

There are some additional provisions in place which reduce the chances of you needing to pay a tax charge:

Carry forward unused allowance: It is possible to carry forward some of your unused allowance which can either reduce or remove the need to pay any tax. We will do this on your behalf, however we are unable to assess your overall position for you as we have no access to any benefits you hold elsewhere.

Scheme pays: If you still have a taxable amount due after carry forward, it is sometimes possible to elect for the 'scheme to pay' the charge on your behalf and recoup the cost by (permanently) applying a one-off reduction to your benefits.

Please contact us if you need further information on any of the above, although note that we cannot provide financial advice or advise on benefits not held with us.  

Most people will not be affected by the AA tax charge.

You are most likely to be affected if you:

  • Are a higher earner.
  • Have final salary membership in the LGPS, and you receive a significant pay increase.
  • Pay a high level of additional contributions.

The standard AA limit is set by HM Treasury and is currently £60,000. The limit refers to the amount that the value of your pension can increase before tax charges apply. As your pension is a defined benefits scheme and thus expressed as an annual pension (sometimes with an automatic lump sum) it is necessary to use a formula to convert your pension into a single value and then to work out the growth. We do this on your behalf and will let you know if you exceed the limit.

Important: We can only provide you with figures based on the benefits you hold with us. We are unable to determine your overall annual allowance position and thus if any tax charge should apply. If you need support to assess your overall position we suggest you speak with a financial adviser.

 

Calculating the Annual Allowance

The following steps apply:

  • Calculate the opening and closing values of your LGPS pension.
  • Take the closing value and then minus the opening value from the start of the year.

In the LGPS, your annual pension growth is calculated by looking at the value of your pension at the start of the tax year (6 April), which is then adjusted by inflation, and then comparing this to the value of your pension at the end of the tax year (5 April).

 

Calculate the Opening and Closing Value of your pension

Opening Value:

Step One: Calculate your pension accrued at the start of the year.
Step Two: Multiply this value by 16.
Step Three: Add any additional lump sum value.
Step Four: Increase the total value by CPI.

Closing Value:

Step One: Calculate your pension built up by the end of the year.
Step Two: Multiply this value by 16.
Step Three: Add any additional lump sum value.
Step Four: Add any Additional Voluntary Contributions paid.

If the value of your pension benefits at the end of the year minus the value of your pension benefits at the start of the year is more than the AA, then you may have to pay a tax charge.

There are some additional provisions in place which reduce the chances of you needing to pay a tax charge:

Carry forward unused allowance: It is possible to carry forward some of your unused allowance which can either reduce or remove the need to pay any tax. We will do this on your behalf, however we are unable to assess your overall position for you as we have no access to any benefits you hold elsewhere.

Scheme pays: If you still have a taxable amount due after carry forward, it is sometimes possible to elect for the 'scheme to pay' the charge on your behalf and recoup the cost by (permanently) applying a one-off reduction to your benefits.

Please contact us if you need further information on any of the above, although note that we cannot provide financial advice or advise on benefits not held with us.  

On 6 April 2024, two new lump sum allowances were introduced: Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).

These lump sum allowances restrict the payment of tax-free cash but, as with the previous Lifetime Allowance, most members have not been impacted by these.

 

Lump Sum Allowance

The Lump Sum Allowance (LSA) is the total amount of lump sum you can take in your lifetime without incurring a tax charge. This covers any pension benefits you have across all tax-registered pension arrangements - not just the LGPS.

The LSA was set at £268,275 from 6 April 2024. There is no provision for this amount to be increased automatically, even by the rate of inflation. Those members who have a valid HMRC protection from the Lifetime Allowance may have a different LSA.

Lump sums paid in excess of the LSA are taxed at your marginal rate.

When you take your LGPS benefits we will ask you for details of other tax-free lump sums received over a value of £130,000.

 

Lump Sum and Death Benefit Allowance

The Lump Sum and Death Benefit Allowance (LSDBA) was set at £1,073,100 from 6 April 2024. There is no provision for this amount to be increased automatically, even by the rate of inflation.  Those members who have a valid HMRC protection from the Lifetime Allowance may have a different LSDBA.

Any payment which is in excess of the deceased member's available LSDBA is taxable as income in the hands of the beneficiary. The reporting and payment of this tax is the responsibility of the deceased member's personal representative.

Please contact us if you think you may be impacted by either of the above.

On 6 April 2024, two new lump sum allowances were introduced: Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).

These lump sum allowances restrict the payment of tax-free cash but, as with the previous Lifetime Allowance, most members have not been impacted by these.

 

Lump Sum Allowance

The Lump Sum Allowance (LSA) is the total amount of lump sum you can take in your lifetime without incurring a tax charge. This covers any pension benefits you have across all tax-registered pension arrangements - not just the LGPS.

The LSA was set at £268,275 from 6 April 2024. There is no provision for this amount to be increased automatically, even by the rate of inflation. Those members who have a valid HMRC protection from the Lifetime Allowance may have a different LSA.

Lump sums paid in excess of the LSA are taxed at your marginal rate.

When you take your LGPS benefits we will ask you for details of other tax-free lump sums received over a value of £130,000.

 

Lump Sum and Death Benefit Allowance

The Lump Sum and Death Benefit Allowance (LSDBA) was set at £1,073,100 from 6 April 2024. There is no provision for this amount to be increased automatically, even by the rate of inflation.  Those members who have a valid HMRC protection from the Lifetime Allowance may have a different LSDBA.

Any payment which is in excess of the deceased member's available LSDBA is taxable as income in the hands of the beneficiary. The reporting and payment of this tax is the responsibility of the deceased member's personal representative.

Please contact us if you think you may be impacted by either of the above.