Tax and your pension benefits

Money - coins and cash

One of the benefits of the Local Government Pension Scheme (LGPS) is that there is tax relief on the contributions you pay into the scheme.

There are controls on the total amount of contributions you can make into all pension arrangements and receive tax relief on, and on the pension savings you can have before you become subject to a tax charge. This is in addition to any income tax you pay on your pension once it is in payment.

Most people will be able to save as much as they wish as their pension savings will be less than the allowances.

At the present time there is no overall limit on the amount of contributions you can pay, although there is a limit of £6,755 on the extra LGPS pension you can buy by payment of Additional Pension Contributions (APCs).

Although there is no overall limit on the amount of contributions you can pay to all schemes, tax relief will only be given on contributions up to a total of 100% of your taxable earnings in a tax year (or, if greater, £3,600 to a 'tax relief at source' arrangement, such as a personal pension or stakeholder pension scheme).

If you have an Additional Voluntary Contributions (AVCs) contract which started before 1 April 2014, you are limited to paying 50% of your pay each pay period into your AVC. That limit does not apply if you have an Additional Voluntary Contributions (AVCs) contract which started on or after 1 April 2014.

There are two controls set by Her Majesty’s Revenue and Customs (HMRC) - the annual allowance and the lifetime allowance.

This is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. From the tax year 2016/2017 the pension savings year for all pension schemes runs from 6 April to 5 April; this is called the pension input period. Prior to the tax year 2016/2017 the pension savings year in the LGPS ran from 1 April to 31 March.

The annual allowance limit since 2011/12 is set out below:

2011/12 £50,000
2012/13 £50,000
2013/14 £50,000
2014/15 £40,000
2015/16 £80,000 (transitional rules applied)
2016/17 £40,000*

*From 2016/2017 a new tapered allowance is being introduced for higher earners.

Generally, assessing your pension growth for the annual allowance covers any pension benefits you may have in all tax-registered pension arrangements where you have been an active member of the scheme during the tax year i.e. you have paid contributions during the tax year (or your employer has paid contributions on your behalf).

You would only be subject to an annual allowance tax charge if the value of your pension savings for a tax year, increase by more than the annual allowance for that tax year, or if you are subject to the tapered annual allowance, if your savings increase by more than your tapered annual allowance.

However, a three year carry forward rule allows you to carry forward unused annual allowance from the previous three tax years. This means that even if the value of your pension savings increase by more than the annual allowance in a year you may not be liable to the annual allowance tax charge.

For example, if the value of your pension savings in 2015/16 increased by £50,000 (i.e. by £10,000 more than the annual allowance) but in the three previous years had increased by £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of the annual allowance for those three years would more than offset the £10,000 excess pension saving in the current year. There would be no annual allowance tax charge to pay in this case. To carry forward unused annual allowance from an earlier year you must have been a member of a tax registered pension scheme in that year.

Most people will not be affected by the annual allowance tax charge because the value of their pension saving will not increase in a tax year by more than the annual allowance limit or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward.

If, however, you are affected you will be liable to a tax charge (at your marginal rate) on the amount by which the value of your pension savings for the tax year, less any unused allowance from the previous three years, exceeds the annual allowance.

The Avon Pension Fund will inform you if your LGPS pension savings in a pension input period are more than the annual allowance limit no later than 6 October following the end of the relevant tax year.

Special rules apply if you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015, or you are a higher earner to whom the 'tapered annual allowance' applies.

More details can be found in the factsheet Pensions Taxation - Annual Allowance

PDF iconFactsheet - Pensions Taxation - Annual Allowance

The lifetime allowance is the total value of all pension benefits you can have without triggering an excess benefits tax charge. If the value of your pension benefits when you draw them (not including any state retirement pension, pension credit or any partner's or dependant's pension you may be entitled to) is more than the lifetime allowance, or more than any protections you may have (see below), you will have to pay tax on the excess benefits. The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements - not just the LGPS.

The lifetime allowance limit has been steadily reducing from 2012/13 as below:

2011/12 £1.80 million
2012/13 £1.50 million
2013/14 £1.50 million
2014/15 £1.25 million
2015/16 £1.25 million
2016/17 £1.00 million

For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your pension by 20 and adding any lump sum you draw from the pension scheme.

For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.

When any LGPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your lifetime allowance - so even if your pensions are small and will not be more than the lifetime allowance you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your lifetime allowance.

If your LGPS benefits are more than your lifetime allowance you will have to pay tax on the excess. If excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%.

There are protections called primary lifetime allowance protection, enhanced protection, fixed protection, fixed protection 2014 and individual protection 2014, fixed protection 2016 and individual protection 2016.

More information can be found in the below factsheet

PDF iconFactsheet - Pensions Taxation - Lifetime Allowance

You can get more information about tax allowances for both the annual and lifetime allowance, and protections that are in place, as well as special provisions for very high earners from HMRC.

https://www.gov.uk/government/organisations/hm-revenue-customs

For more information download the Member guide - Tax Controls and Your LGPS benefits guide below.