Pensions are a tax efficient way of saving for your future, because pension contributions are generally tax free. You automatically get tax relief on the contributions you pay into the scheme.
There are 2 key tax limits set by HMRC that you should know about:
- annual allowance
- lifetime allowance
Most scheme members’ pension savings will be less than these allowances, but if you go over either allowance, you may get a tax charge.
The annual allowance is the maximum amount that the value of your pension benefits can increase in any tax year without you having to pay a tax charge. The current limit is £40,000 (April 2018).
That means if the total value of your pension on 5 April has increased by more than £40,000 when compared to the value of your pension on the previous 6 April, (i.e. you are a high earner, or you have received a promotion) you may have to pay a tax charge.
We'll write to you by 5 October and issue you with a pensions savings statement if our records show that you have breached the annual allowance limit, based on the information we hold.
A pension savings statement is a record of the amount of pension that you've built up in our fund during the previous tax year.
Most members who breach the limit will be protected from the charge because any unused annual allowance from the previous 3 years can be carried forward to use this year.
We can only base the information we send you about annual allowance on your Local Government Pension Scheme (LGPS) pension with ourselves. If you have other pension arrangements you may wish to seek independent financial advice.
For more information about annual allowance, please go to the national LGPS members website where a quick check calculator is available.
The lifetime allowance is the total amount that you can build up from all your pension savings in your lifetime without incurring a tax charge.
The current limit is £1,030,000 (April 2018)
- your benefits in the LGPS with Derbyshire Pension Fund
- any pensions you hold with other LGPS funds
- any pension benefits you may have in other tax-registered pension arrangements.
But it doesn't include:
- state pensions and dependant’s pensions.
Most scheme members won’t be affected by the lifetime allowance, however if you are a high earner and have substantial LGPS membership in terms of the years that you’ve been in the scheme, you may be at risk of exceeding the allowance limit when you retire.
The annual pension statement we send you each year includes the percentage of the lifetime allowance that you had reached by 31 March based on the LGPS pension and lump sum you built up with us. This won’t include any additional voluntary contributions (AVCs) you've paid for.
For more information about lifetime allowance, please go to the national LGPS members website where a quick check calculator is available.