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 a threshold for how much total retirement benefit you can build up each year across all registered pension schemes, before incurring additional tax charges. Any excess pension savings above the Annual Allowance are subject to a tax charge, which will be collected through the self-assessment process. For most members the threshold is currently £60,000.
 

Tapered Annual Allowance

 
In April 2016 HMRC introduced the Tapered Annual Allowance and since April 2023 the Tapered Annual Allowance has reduced the standard Annual Allowance by £1 for every £2 of ‘adjusted income’ between £260,000 and £360,000. 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 £360,000 has a fully tapered Annual Allowance of £10,000. 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 such as AVCs and still get tax relief reduces. This is known as the Money Purchase Annual Allowance and it is currently £10,000. This allowance covers both your own contributions and any other contributions paid into your pension pot on your behalf. If you pay into a defined contribution arrangement and are subject to the MPAA, then you can accrue defined benefits up to the Annual Allowance less any defined contribution payments up to the MPAA. 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 (£60,000) or the Tapered Annual Allowance as applicable.
 

Lifetime Allowance

 
The Lifetime Allowance was a limit on the value of pension benefits you could build up in your lifetime without paying a tax charge until 5 April 2023. The Lifetime Allowance tax charge was removed from 6 April 2023, and the Lifetime Allowance will be removed completely from 6 April 2024. The standard Lifetime Allowance for the 2022/23 tax year was £1,073,100, which is equivalent to a total pension of £53,655 a year. If you have previously applied to HM Revenue & Customs for protection, a different Lifetime Allowance will apply to you. The maximum tax free cash lump sum for those without protections is retained at £268,275 (25% of the final Lifetime Allowance in place for the 2022/23 tax year) and will be frozen thereafter.
 

Where can I go for more information?

 
Further information on the various Allowances and how they might affect you can be found at: gov.uk/tax-on-your-private-pension.

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.