Over the past few years, the amount you can save into a pension has dramatically reduced. There have been changes to both the annual allowance, which is the amount you can contribute to a pension each year with tax relief, and the lifetime allowance, which affects the total amount you can save towards your retirement.
The rules apply to both the NHS Pension Scheme as well as any private pensions you may be contributing to, so it is important to find out how they could impact you.
Annual allowance
The annual allowance is the maximum amount of pension savings that benefits from tax relief each year. It has reduced from a high of £255k in the 2010/11 tax year to £50k in subsequent tax years, and will reduce again to £40k from April 6, 2014. If you exceed this amount, and you have any unused annual allowance from the previous three years, you are allowed to carry this forward to offset part or all of your excess contributions.
Lifetime allowance
The lifetime allowance is the maximum amount of pension saving you can build up over your lifetime that benefit from tax relief.
The lifetime allowance reduced from £1.8m in the 2011/12 tax year to £1.5m in subsequent tax years, and will reduce again from April 6, 2014 to £1.25m.
If your pension contributions exceed the lifetime allowance, a tax charge will apply on the amount you’ve saved over this. How much the tax charge will be will depend on whether the excess is taken as income or as a lump sum. If taken as income, the tax charge will be 25 per cent, and if taken as a lump sum, it will be 55 per cent.
It is possible to apply for protection if you think you will exceed the lifetime allowance limits.
Fixed Protection 2014
By applying for Fixed Protection 2014 you can fix your lifetime allowance at £1.5m. This means you can have pension savings worth up to £1.5m without paying a lifetime allowance charge.
However, you will lose the Fixed Protection 2014 if you continue making contributions to your pension pots, build up new benefits in a defined benefits pension scheme, start saving into a new pension fund or join a new pension scheme. In order to take advantage of Fixed Protection 2014, you need to apply before April 6, 2014.
Individual Protection 2014
As well as Fixed Protection 2014, the Government has announced that Individual Protection 2014 will be available when the lifetime allowance reduces to £1.25m from April 6, 2014.
The details of Individual Protection 2014 will be confirmed in the Finance Bill 2014 but it is expected that:
- It will give you a lifetime allowance equal to the value of your pension rights on April 5, 2014, up to a maximum of £1.5m.
- You will not lose Individual Protection 2014 by making further savings into your pension scheme.
- Any pension savings in excess of your lifetime allowance will be subject to a tax charge.
- To be eligible, your total pension pot needs to be more than £1.25m on April 5, 2014. Individual Protection 2014 will be of particular benefit to those who would like to continue making further pension savings after 6 April 2014.
Conclusion
There have been so many changes to pension legislation over the past few years, both in relation to the NHS Pension Scheme itself and pension savings generally, that it can be difficult to keep on top of how it will impact on you.
If it looks as if you will exceed either the annual or lifetime allowance limits you should seek financial advice to discuss what options are available to mitigate the effects of the potential tax charges.