Retirement pension

When you start receiving your pension, it is subject to income tax just as your salary was when you were working.

Tax free cash

The maximum amount of tax free cash which you can take when you retire is usually 25% of the value of your benefits at the time you retire.

Lump sums payable on death

Pension scheme trustees have the discretion to decide to whom lump sum death benefits are paid. This means that most lump sum death benefits are paid outside a member's estate and are therefore free from inheritance tax.

Annual Allowance

The Annual Allowance is the amount by which the value of an individual’s pension benefits can increase each year without incurring a tax liability. The standard Annual Allowance has been set at £40,000 since 6 April 2014. There is the opportunity to carry forward any unused Annual Allowance from up to the three previous tax years to offset an excess in the current tax year. However, any excess benefit still remaining is taxed at your highest marginal rate. In measuring your benefits you must include the increase in value of defined benefit pensions, as well as total contributions made into any defined contribution schemes, including Additional Voluntary Contributions.

Tapered Annual Allowance

In April 2016 HMRC introduced the Tapered Annual Allowance and since April 2020 the Tapered Annual Allowance has reduced the standard Annual Allowance by £1 for every £2 of ‘adjusted income’ between £240,000 and £312,000. Adjusted income includes personal sources of income (such as investment income or income from a buy-to-let property), together with employment-related income and a measure of the increase in pension savings over the tax year. Anyone with an adjusted income of over £312,000 has a fully tapered Annual Allowance of £4,000.
Prior to April 2020 the taper reduced the standard Annual Allowance by £1 for every £2 of adjusted income over £150,000, subject to a maximum reduction of £30,000.  Therefore, anyone with adjusted income of £210,000 or more had an Annual Allowance of £10,000.
It is important to note that since April 2020 the standard Annual Allowance is not reduced if your threshold income for the tax year was £200,000 or less (or £110,000 for the tax years 2016/17 to 2019/20), no matter what your adjusted income was. Threshold income is your adjusted income but excluding the value of your pension benefits over the tax year.
If you exceed the Annual Allowance or the Tapered Annual Allowance you must declare this by completing a Self-Assessment tax return with HMRC no later than 31 January of the following year.

Money Purchase Annual Allowance

If you have flexibly accessed and started to take money from a defined contribution (money purchase) pension, the amount you can then pay into a defined contribution arrangement and still get tax relief reduces. This is known as the Money Purchase Annual Allowance and it is currently £4,000. This allowance covers both your own contributions and any other contributions paid into your pension pot on your behalf.
The main situations when you will trigger the Money Purchase Annual Allowance are:
  • If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
  • If you put your pension pot money into a flexi-access drawdown scheme and start to take an income
  • If you buy an investment-linked or flexible annuity where your income could go down
If you buy an annuity that is not an investment-linked or flexible annuity (i.e. a lifetime annuity) then the trigger does not apply. You will be subject to the standard Annual Allowance (£40,000) or the Tapered Annual Allowance as applicable.

Lifetime Allowance

The Lifetime Allowance is the limit on the total value of pension benefits that an individual can build up over their working life (including current and previous employer pension schemes, Additional Voluntary Contributions and private pension provision) without incurring a tax charge. The Lifetime Allowance has been set at £1,073,100 since 6 April 2020, which is equivalent to a total pension of £53,655 a year. Benefits may be paid above this value but will be subject to a Lifetime Allowance Tax Charge. Any tax due will be deducted from the settlement of benefits at retirement. Before receiving retirement benefits from the scheme you will need to sign a declaration confirming whether you have received any pension benefits that have already been assessed against the Lifetime Allowance. 

In addition certain lump sum benefits paid out on your death before age 75 also use up your Lifetime Allowance. This includes any life assurance lump sum benefit provided through a UK registered scheme, which would typically be based on a multiple of your salary. Any defined contribution pension savings that have not yet been put into payment and have not previously been assessed against the Lifetime Allowance would also need to be included in the valuation against the Lifetime Allowance. Any amount in excess of the Lifetime Allowance will be taxed at 55%. Your personal representatives would be responsible for determining whether a Lifetime Allowance Charge applies.

Those who have already built up large pension savings can apply to HM Revenue & Customs for protection. Information on the current open protections can be found at

How can I work out what my total benefits are worth?

In order to work out how much of the Lifetime Allowance you will use you will need to consider all the pensions to which you are entitled. The administrator for each of your pension schemes can provide you with this information to enable you to work out the total. For in service members the estimated Lifetime Allowance used by your BAE Systems pension is included in your annual benefit statement.

Is the Lifetime Allowance the same for everybody?

Certain people are entitled to a higher (enhanced) Lifetime Allowance if they have previously applied to protect their benefits which were above the Lifetime Allowance, either at the time the tax rules changed in April 2006 or in 2012, 2014 or 2016 when other windows for transitional protections were made available. Examples include Enhanced Protection, Primary Protection, Fixed Protection 2012, 2014 and 2016 and Individual Protection 2014 and 2016.

Lifetime Allowance Charge

This is the charge applied when the total value of benefits is more than the Lifetime Allowance. Lump sums are taxed at 55% and pensions at 25%.


Where can I go for more information?

Further information on the various Allowances and how they might affect you can be found at:

For more information on the Annual Allowance and Lifetime Allowance refer to the Pension Guides which can be found on the More Info > Pension Guides page of this website.