Jump to main content Jump to main navigation Jump to secondary navigation Jump to related links Jump to legal information      Log in | Home | Contact Us | Site Map |

About Us Consumers Advisers Employers Media

Scottish Life: A division of Royal London

Adviser  >  Technical Central  >  Information & guidance  >  Contributions  >  Contributions & allowances

Contributions & allowances

The limits and allowances on pension contributions changed on A-Day. This analysis focuses on the key areas and also briefly covers the lifetime allowance charge, transitional protection and the key advice issues for financial advisers.

What can be paid in?

There is no longer any difference between different types of pension scheme. Individuals can contribute to any number of pension plans subject to the limits outlined below.

Individuals

Since A-Day individual contributions are unlimited. However there is a limit on the amount of gross contributions that an individual can pay each year and benefit fully from tax relief. This is restricted to:

  • The higher of £3,600 or 100% of salary – subject to the annual allowance (see below)

Special rules apply for those who are not resident in the UK.  Further details can be found in Contributions to Registered Schemes for Overseas Individuals.

Employers

Employer contributions are also unlimited but it is up to the Employer's local inspector of Taxes whether or not the entire contribution will be relievable for tax purposes.  Large single contributions can have tax relief spread over a period of years where:

  • they are over £500,000, and
  • exceed 210% of the contribution paid in the previous year

Our factsheet entitled Contributions and spreading has full details on contributions and spreading tax relief. 

Annual allowance

An annual allowance for pension savings applies each year. Under a money-purchase (MP) scheme this is simply the value of the contributions paid in a scheme year. However, under a defined benefit (DB) or cash balance (CB) scheme it is the increase in the value of a member's rights over the scheme year.

Within this allowance individual gross contributions are restricted to the higher of £3,600 or 100% of salary. Employer contributions are unaffected by the annual allowance but they may not receive tax relief on the entire contribution. Individuals are subject to a 40% tax charge on the amount of any contribution (both individual and employer) paid in excess of the annual allowance each year. This also applies to any benefit increase under a DB or CB scheme over the annual allowance.

The Government initially confirmed details of the annual allowance amounts that will apply for the tax years 2006/07 to 2007/08 – 2010/11. These are:

Tax Year

Annual Allowance

2006/07

£215,000

2007/08

£225,000

2008/09

£235,000

2009/10

£245,000

2010/11

£255,000

The pre-Budget Report delivered on 24 November 2008 announced that for tax years 2011/12 to 2015/16, the annual allowance will be maintained at its 2010/11 level of £255,000. It will then be reviewed.  Further details can be found in: Pre Budget Report 2008.  The Finance Act 2004 does not permit the annual allowance to be reduced.

It is possible for those who are planning to retire to accrue benefits in excess of statutory limits or pay contributions that exceed the annual allowance in their final year.  Tax relief will only be paid on individual contributions up to the higher of £3,600 or 100% of salary, subject to the annual allowance.  It is up to the Employer's local inspector of taxes whether 100% tax relief is granted on any employer contribution. The benefits value at retirement will still be subject to the appropriate Standard Lifetime Allowance (SLA) when benefits are taken but this does provide an opportunity to fund up to the SLA in the final year for anyone who can afford to do so.

The annual allowance applies in total to all pension benefits an individual may have. The table below details how these benefits are valued when testing against the annual allowance:

Type of benefit

Value of rights

Notes

Money Purchase Benefits

The total contributions paid in any one-scheme year, excluding age-related rebates.

This includes all individual and Employer contributions.

Cash Balance Plans

 

 

The increase in the value of the individual's rights over the scheme year.

When working out how much the benefits have increased by, the amount at the beginning of the year must first be increased by the higher of 5% or the percentage increase in the RPI or any other rate specified by HM Revenue and Customs (HMRC). This is then compared with the value at the end of the year.

The rights to be valued will include partial benefits taken during the year, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.

Defined Benefits Schemes

 

 

 

The increase in value of the individual's rights over the scheme year.

Benefits will be valued using a standard valuation factor of 10:1 regardless of age or sex.

Defined lump sums (i.e. not by commutation) will be taken to be the actual lump sum and added on to the value given above.

Deferred benefits must be increased by 5% or RPI if higher before the 10:1 factor is used.

The rights to be valued will include any benefits taken during the year, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.

Standard lifetime allowance (SLA)

The SLA creates a ceiling on the value of pension benefits that can be built up by an individual in a registered pension scheme (unless primary or enhanced protection applies or when a pension debit is made since A-Day). Details of the SLA for the tax years 2006/07 – 2010/11 are as follows: 

Tax Year

Lifetime Allowance

2006/07

£1,500,000

2007/08

£1,600,000

2008/09

£1,650,000

2009/10

£1,750,000

2010/11

£1,800,000

The pre-Budget Report delivered on 24 November 2008 announced that for tax years 2011/12 to 2015/16, the lifetime allowance will be maintained at its 2010/11 level of £1,800,000. It will then be reviewed.  Further details can be found in: Pre Budget Report 2008.  The Finance Act 2004 does not permit the lifetime allowance to be reduced.

The SLA applies to the value of all pension benefits built up by an individual. When benefits are taken (crystallised) they are tested against the SLA. The valuation basis depends on the way in which benefits are taken. The table below details how benefits are valued:

Type of arrangement

Valuation basis for benefits crystallised

Defined Benefits

DB schemes can only offer a scheme pension. A scheme pension involves paying a pension for life out of the scheme assets or buying an annuity out of the scheme assets.

The value of the annual amount of pension promised by the scheme is multiplied by a standard valuation factor of 20:1. This factor includes an allowance for dependant's benefits up to the level of the member's pension at date of death and for annual increases of 5%. Any DB scheme that provides better increases can apply to HM Revenue and Customs for a scheme specific valuation factor which can be higher than 20:1.

Defined Lump Sums (otherwise than by commutation) are valued using a factor of 1:1 and are added to the above value.


Money Purchase (including Cash Balance) benefits

Unsecured Income
The valuation basis is based on the actual fund value (market value of the assets) used to secure either:

  • Income Drawdown, or
  • Short-term annuities

Alternatively Secured Pension (ASP)
The valuation basis is simply the fund value (market value of the assets) used to secure ASP.

Secured Income
The valuation basis used depends on the option chosen when benefits are crystallised. These are:

  • Lifetime Annuity - This is simply valued on the basis of the fund value used to secure the lifetime annuity.
  • Scheme Pension - Same as DB above.

    If a scheme provides separate Pension Commencement Lump Sum (PCLS) and not by way of commutation this will be valued based on a valuation factor of 1:1 and added to the value above.

Lifetime allowance (LA) charge

The lifetime allowance charge applies to all those who have benefits in excess of the SLA when they retire or die etc. Those who have opted for enhanced protection on their pre A-Day benefits will be fully exempt from this charge provided they do not contribute to any further pension arrangement after A-Day. However those who have opted for primary protection will be subject to a LA charge on the benefits value over their personal lifetime allowance. The LA charge can apply in either of two ways or a combination of both depending on how the excess benefits are taken. The charge is:

  • 25% on any income taken, and
  • 55% if taken as a lump sum.

Transitional protection

Individuals can protect their pre A-Day rights from the SLA by selecting from two forms of protection or both. These are:

Primary Protection (PP)

Enhanced Protection (EP)

  • Applies to anyone who had pre A-Day funds in excess of the SLA of £1.5m on 5 April 2006 and wants to register their own personal lifetime allowance (PLA).
  • Expressed as a factor, it's the difference between the total of all pension savings held on 5 April 2006 and the SLA in force at 6 April 2006.
  • This enhanced lifetime allowance factor will be increased in line with the SLA and applied to the lifetime allowance in force at the point benefits are paid on retirement/death (known as a ‘crystallisation event’).
  • Any amounts in excess of this will be subject to a LA charge.
  • Contributions can continue if suitable.
  • The PCLS will be protected as a monetary amount if it exceeded 25% of the SLA on 5 April 2006. The amount payable will be the amount of PCLS available at 5 April 2006 indexed in line with increases to the SLA. 
  • Applies to anyone who wants full protection from the lifetime allowance charge.
  • There is no minimum fund to register for EP. Provided you also registered for PP (if applicable) you will retain the right to opt for PP at a later date if necessary.
  • Anyone who selects EP must stop being an active member of all registered pension schemes prior to A-Day and cannot build up any further benefits in a registered pension scheme on or after A-Day, with the exception of any rebate payments that commenced prior to A-Day. Anyone who does, without advising the HM Revenue and Customs, will face a fine of up to £3000.
  • If the member was entitled to PCLS of >25% of the benefits value at 5 April 2006 the amount of PCLS at vesting will be the amount of PCLS at 5 April 2006 increased in line with the SLA. If they were entitled to >25% of the SLA at 5 April 2006, at vesting the PCLS will be based on the same percentage of the benefits value as it was on A-Day. The maximum amount of PCLS that can be paid is equal to the SLA at vesting.

Advice issues

There’s no doubt that the advice that financial advisers can provide will be in demand. The main advice issues for financial advisers to consider include:

  • Identify and target clients with TFC entitlement of greater than 25% of their fund.
  • Discuss with clients the form of protection required.
  • Identify clients with the potential to increase contributions up to the annual allowance, especially in the same tax year.
  • Any application for transitional protection must be received by HMRC by 5 April 2009. See 5 April 2009 deadline for primary and enhanced protection.




All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

In addition, the information provided is also based on our current understanding of the relevant Finance Acts.

Published 29 September 2004

Updated 22 December 2008

                                                                                                                                                                                                                 

Back to top
Legal Disclaimer

© Scottish Life, St Andrew House, 1 Thistle Street, Edinburgh, EH2 1DG.
Scottish Life is a division of Royal London and markets products produced by Royal London. Royal London consists of The Royal London Mutual Insurance Society Limited and its subsidiaries. The Royal London Mutual Insurance Society Limited provides life and pension products, is a member of the Association of British Insurers and is authorised and regulated by the Financial Services Authority, registration number 117672. Royal London Marketing Limited acts as an insurance intermediary for general insurance products and is authorised and regulated by the Financial Services Authority, registration number 302391.