Annual & Lifetime Allowance

£40,000 in tax year 2016/17

The Annual Allowance sets the maximum amount of pension savings that you can build up in any one year before incurring a tax charge. This includes actual employer and employee contributions to Defined Contribution schemes (such as an AVC scheme or the partnership pension scheme), as well as benefits built up in Defined Benefit schemes like classic, classic plus, premium, nuvos and alpha.

Annual Allowance is worked out as 16 times the increase in the value of your pension during the year, plus the increase in value of any automatic lump sum (classic/classic plus only). A measure for inflation is included in the calculation.

Please be aware that this doesn’t just affect high earners. Any of the following could have an impact on the amount of Annual Allowance you use:

  • Buying added pension (especially lump sum purchases)
  • Contributing towards other pensions savings such as AVCs
  • Getting a significant pay rise
  • Leaving on ill health retirement with an enhancement to your service (Please see separate fact sheet on this specific issue - Impact of Annual Allowance on ill health retirement)
  • Transferring in service from another pension scheme under the preferential Club Transfer terms
  • Aggregating or linking a previous period of employment from the Civil Service.

If you have breached the Annual Allowance due to your Civil Service pension alone (not including any Defined Contribution AVCs you may be making) you will receive a pension savings statement. These will be issued in October 2016 for financial year 2015/16.

Please be aware that if you are making other pension contributions, eg. to a personal pension, it is your responsibility to assess whether you have breached the Annual Allowance across all your pension contributions.

You will only receive a pension savings statement if you have breached the limit in the Civil Service pension alone, or if you have requested a statement.

If you do incur an Annual Allowance tax bill in relation to your Civil Service pension and it is more than £2,000, then you will have the option of requesting the Scheme Pays facility. Scheme Pays is where the pension scheme will pay an amount of tax for you in exchange for a permanent reduction to your pension. Contact the pension administrator if you would like to use Scheme Pays.

Lifetime Allowance – £1m from 6 April 2016

On 6 April 2016, the Lifetime Allowance was reduced from £1.25 million to £1 million.

To calculate the value of your pension for Lifetime Allowance purposes, multiply the annual payment by 20, and add any lump sum which is an automatic entitlement (classic and classic plus). This will mean potentially higher tax bills for some people retiring with a pension of £50,000 or more (premium, nuvos or alpha) or £43,480 (plus lump sum) for members of classic.

Protection

HM Revenue & Customs introduced two types of protection for members who are affected by reductions to the Lifetime Allowance in 2014 – Fixed Protection 2014 and Individual Protection 2014.

It is no longer possible to apply for Fixed Protection 2014; however, new Fixed Protection and Individual Protection for the 2016 changes has been introduced by HM Revenue & Customs.

You can still apply for Individual Protection 2014 until 5 April 2017. You should consider matters carefully and may wish to consult an independent financial adviser.