Pension Drawdown Allowances
If you’re claiming, or are about to claim, pension drawdown you must adhere to both annual and lifetime allowance guidelines.
It’s very important to have a clear understanding as to what these guidelines are and how they could affect your pension drawdown.
To clarify these areas we’ve produced a guide to drawdown pension allowances which covers the following areas:
- What is my drawdown pension annual allowance?
- What is my annual allowance before I begin to take income drawdown?
- What happens to my pension drawdown if I go over my personal allowance?
- Am I allowed to carry forward any unused annual allowance from previous tax years?
- What is the tapered annual allowance?
- How does my annual allowance change once I commence income drawdown?
- How much is the pension drawdown lifetime allowance and how does it work?
- Speak to a pensions expert about income drawdown allowances
What is my drawdown pension annual allowance?
If you have contributed to a personal pension plan (also known as a defined contribution or money purchase scheme) at any time during your working life, once you reach the age of 55 you are allowed to commence taking an income from your pension fund.
The key benefit of a personal pension plan as a savings vehicle for retirement is the ability to claim tax relief on your pension contributions. The additional tax relief helps boost your pension drawdown fund at retirement and is subject to an annual allowance limit.
Your annual allowance will differ depending on whether you have commenced taking withdrawals from your pension drawdown or not.
What is my annual allowance before I begin to take income drawdown?
The annual allowance is a limit on the amount of contributions you can make into your defined contribution pension fund each year and still receive tax relief.
The maximum amount you are allowed to contribute to a personal pension plan and still receive tax relief is as follows:
- £2,880 (for non-taxpayers)
- 100% of annual earnings or the annual allowance (whichever is lower)
The annual allowance for pension contributions is currently £40,000 (at the time of writing ). This allowance is not per scheme – it applies to all defined contribution schemes you, your employer or any other entity may be contributing towards on your behalf.
As an example, if you earn £25,000 during this tax year and your total pension contributions are £30,000, you will only receive tax relief on £25,000. Alternatively, if you earn £50,000 this tax year you can contribute up to £40,000 and still receive tax relief for this amount.
If you are a non-taxpayer you can still receive tax relief on pension contributions up to a maximum of £2,880 (net) which equates to £3,600 (gross) with the addition of 20% tax relief from the government.
What happens to my pension drawdown if I go over my personal allowance?
Any contributions over your annual allowance will not attract tax relief and are subject to an annual allowance tax charge which basically equates to an increase in tax liability for the excess amount at your marginal rate of income tax.
To avoid this happening, simply keep an eye on your total contributions. You can also use a self-assessment form to assess whether you have exceeded your annual allowance.
If you have exceeded your annual allowance by quite a large amount, leaving you with a substantial charge (typically in excess of £2,000) you can ask your pension scheme administrator to pay for this charge from your pension fund.
Be mindful, however, that this will reduce your overall pension drawdown fund when you reach retirement.
Am I allowed to carry forward any unused annual allowance from previous tax years?
Yes, it’s possible. You are allowed to carry forward any unused allowance from the previous three tax years. You are still bound by the same rule regarding your earnings, therefore, if, for example, you earn £70,000 this tax year and total unused relief equates to £80,000 you can only contribute £70,000.
You must also have been a member of a pension scheme during the tax years from which you are carrying forward your unused allowance.
If you’d like to know more about accessing unused annual allowances get in touch and we can arrange for a pensions expert to speak with you directly.
What is the tapered annual allowance?
Tapered annual allowance applies to higher incomes of more than £150,000. If your earnings exceed this amount your total annual allowance will fall. If your total income is between £150,000 and £210,000, £1 of annual allowance is lost for every £2 of income earned.
Your total income, for the benefit of tapered annual allowance, includes income from all sources and includes employer pension contributions. The tapering effectively reduces your annual allowance down to £10,000 for earnings in excess of £210,000.
The table below illustrates how the tapered annual allowance works:
|Total Earnings||Annual Allowance|
How does my annual allowance change once I commence income drawdown?
If you start taking income drawdown from your pension whilst still working and want to continue making contributions to your personal pension, the money purchase annual allowance (MPAA) could come into effect.
For the current tax year, the MPAA is £4,000 (correct at the time of writing) which is quite a significant reduction from the annual allowance available to you before taking income drawdown.
The MPAA only comes into effect if any of the following events occur:
- The whole pension fund is taken as one lump sum through flexi-access drawdown
- Regular or ad hoc income payments are taken through flexi-access drawdown
- Regular income payments are taken using an uncrystallised funds pension lump sum (UFPLS)
The MPAA is not triggered if you only take the 25% tax-free lump sum at outset and do not take any regular or ad hoc payments.
Once the MPAA is triggered there is no access to any unused annual allowances or carry forward from previous tax years.
If you’re considering taking income drawdown but concerned about triggering the MPAA, make an enquiry and we can arrange for a pensions advisor we work with to contact you directly to discuss further.
How much is the pension drawdown lifetime allowance and how does it work?
Every pension plan is subject to a lifetime allowance limit which, if exceeded, can trigger additional tax charges for your income drawdown fund. The lifetime allowance is a cap on the size of a pension fund and could have the effect of reducing the amount you can drawdown in retirement.
The lifetime allowance should only really impinge upon larger pension funds. The current limit is £1,055,000 for the current tax year (2019/20).
What could trigger a lifetime allowance calculation on my income drawdown fund?
A pension provider could undertake a lifetime allowance calculation on your income drawdown fund when one of the following events occur:
- When you start taking drawdown income from the fund (before the age of 75)
- When you reach 75 years of age
- If you make a request to transfer your pension fund overseas
No further calculations would normally take place beyond the age of 75 of a pension scheme member.
What charge could apply to my income drawdown fund if the lifetime allowance is exceeded?
The amount of the charge for exceeding the lifetime allowance differs depending upon whether the excess amount was taken as income drawdown or as a lump sum.
A 25% tax charge is incurred for income drawdown withdrawals over the lifetime allowance and a 55% tax charge is due for any lump sum withdrawals.
If you’re concerned that your pension drawdown fund may have gone over your lifetime allowance, make an enquiry with us and we can arrange for an advisor we work with to get in touch and review everything with you.
Speak to an expert on pension drawdown tax allowances
If you have questions and want to speak to an expert for the right advice, call 0808 189 0463 or make an enquiry.
We work with pensions experts who can offer you the right advice on pension drawdown allowances and we can introduce you to one of them for free.