Annual and lifetime allowances
There's a limit to the amount you can invest in pension plans every year before you are taxed on your contributions. It's set by the Government and it's called the annual allowance.
It's not as easy as counting the contributions you make in the tax year, 6 April to the following 5 April. It's the contributions you make during what's known as a pension input period (PIP) that count. This may be the same as the tax year, but it may not, so you should check with your financial adviser or pension provider who will tell you what your PIP is.
The annual allowance which applies is based on the tax year that your PIP ends in. For example, if your PIP runs from 1 December 2013 to 30 November 2014, it would end in the 2014/15 tax year. The annual allowance for the 2014/15 tax year is £40,000, which means you could contribute £40,000 before a tax charge may apply.
The annual allowance has reduced from £50,000 to £40,000 for PIPs ending on or after 6 April 2014. This means that contributions made in the 2013/14 tax year could be tested against the £40,000 annual allowance. For example, if the PIP currently runs from 1 May 2013 to 30 April 2014, any contributions made from 1 May 2013 will be tested against the £40,000 annual allowance as this ends in the 2014/15 tax year. However, if the PIP ended on 5 April 2014, the contributions will be tested against the £50,000 annual allowance as this ends in the 2013/14 tax year.
There's a limit to the amount you can have built up in any pension plan when you start taking your retirement benefits. It's set by the Government and it's called the lifetime allowance. The lifetime allowance for the 2014/15 tax year is £1,250,000.
Last update: April 2014