Teachers' Pensions

Annual allowance and Lifetime allowance

Got a question about Annual allowance or Lifetime allowance? You've come to the right place.

  • What is Annual Allowance?

    The Annual Allowance (AA) is a limit of the tax free growth or input you can have in all registered pension schemes in a tax year. If the AA is exceeded, this gives rise to an AA charge. The current AA figure can be found on our updates page.

  • How is the growth in my pension benefits measured?

    In the Teachers’ Pension Scheme, the Pension Input Amount is calculated as follows:

    Opening Calculation = [(Pension x 16) + Lump Sum] x Consumer Price Index (CPI)

    Closing Calculation = (Pension x 16) + Lump Sum

    Pension Input Amount = Closing Calculation - Opening Calculation

    There is a tool on the HMRC website that can help you work out if you’re affected or not.

    If your pension savings (or PIA) is above the Annual Allowance in a particular year, you might be able to offset the Annual Allowance tax charge if your pension savings were under the Annual Allowance in earlier years.  If you think that this might affect you, you should speak to an Independent Financial Advisor.

    * With the exception of the 2015/16 tax year, when we were transitioning to align our pensions savings statement with the tax year. In 2015/16 we used two separate pension input periods.

    For further information please see the 'Pension and tax' section of our website.

     

  • Over what period is the growth in pension savings assessed?

    The growth in pension savings is measured against the Annual Allowance (AA) in each tax year. This is known as the Pension Input Period (PIP). For the Teachers’ Pension Scheme, from the tax year 2016/17 onwards, the PIP runs from 6 April to 5 April each year and any growth in your pension between 6 April and 5 April is assessed against the AA.

  • How will I know if I have exceeded the Annual Allowance?

    If your growth in benefits in the Teachers’ Pension Scheme exceeds the Annual Allowance (AA), we’ll provide you with a Pensions Savings Statement. The statement will include details of the growth in benefits during the Pension Input Period (PIP) and the Pension Input Amounts for the three preceding years, to enable you to establish the extent of any carry forward available.

     

    A Pensions Savings Statement can also be provided on request to assist you in determining whether you have an AA charge liability. If you have pension savings elsewhere, you may consider asking all your schemes for Pensions Savings Statements – it’s your responsibility to check whether or not you exceed the Annual Allowance.

    Please visit the HMRC website for more information on what pension scheme administrators must provide.

  • Under what circumstances are my benefits likely to exceed the Annual Allowance?

    There are a number of scenarios where a person could exceed the Annual Allowance (AA). These include:

    • Members who have a large increase in salary during the Pension Input Period (PIP), especially if they already have significant service accrued.
    • Members who leave service in the Teachers’ Pension Scheme and later return to pensionable employment on a higher salary, as any periods of service are automatically linked together, which will affect the growth in their benefits during that PIP.
    • Members purchasing a large amount of Additional Pension by way of a single contribution.
    • Members looking to pay the outstanding balance of Past Added Years could breach the AA, if they exercise this option on leaving employment or at retirement.
    • Members using their redundancy funds to increase pension benefits could be affected. This includes any members who have sacrificed part of any redundancy payment to allow their employer to purchase Additional Pension on their behalf. 
    • Members with high earnings who may be subject to the tapered AA.

    For further information please see the 'Pension and tax' section of our website.

  • What happens if I exceed the Annual Allowance threshold?

    If you exceed the Annual Allowance (AA) limit in a year and you don't have sufficient carry forward from previous years, you’ll be required to pay a tax charge on the value of pension savings that are above the Annual Allowance.

  • When will I be able to tell if I am affected?

    The timetable of events is as follows:

    • Your employer(s) provide us with your service and salary data up to 31 March by 6 July.
    • We issue your Pensions Savings Statement, if applicable, by 6 October.
    • Your decision to exercise the Scheme Pays option must be made to HMRC no later than 31 January following the tax year end.

    If the data is received from your employer after 6 July, we’ll have three months from when we receive it to supply your Pensions Savings Statement from the date of receipt.

    For further information please see the 'Pension and tax' section of our website.

  • How do I check whether the reduction in the Annual Allowance will affect me?

    Please visit our annual allowance calculators to find out more.

  • Who's responsible for notifying HMRC of a liability and Annual Allowance charge?

    You’re responsible for reporting any excess over the Annual Allowance (after utilising any carry forward) via a self assessment tax return. The amount of Annual Allowance charge will be included in the tax calculation and you would normally have to pay this tax charge by the usual self assessment payment deadlines.

  • Can the Scheme pay the Annual Allowance for me?

    If the growth in your Pension Input Amount (PIA) in the Teachers’ Pension Scheme is above £40,000 and your Annual Allowance charge is £2,000 or more, you may be able to ask us to pay the AA charge (or a proportion of the AA charge) to HMRC on your behalf. This is known as a “Scheme Pays election”. Any Scheme Pays elections must be received by 31 July* in the year following the tax year in question. For example, the deadline is 31 July 2018 in respect of the 2016/17 tax year.

    Where a Scheme Pays election is accepted your scheme benefits will be reduced when you access them.

    If you have several pension schemes that don’t individually exceed the AA but when added together do exceed Annual Allowance you will not be able to make a Scheme Pays election through the Teachers’ Pension Scheme – though your other pension provider may permit this option.

    * Note that you must inform HMRC of your decision to exercise the Scheme Pays option by 31 January in the year following the tax year in question. In the example this will be 31 January 2018.

    For further information please see the 'Pension and tax' section of our website.

  • If I make a scheme pays election what is the impact on my benefits?

    The reduction in your benefits can be calculated using actuarial factors that reflect the cost of making the payment to the Scheme. Any reduction in pension benefits applies for life. Details of the calculation and the factors can be found here.

  • If I want to make a scheme pays election what's the deadline for submission?

    If you’re retiring you must make the scheme pays election before you retire, otherwise you have until 31 January following the tax year in which the Pension Input Period (PIP) ended to tell HMRC that you require the Scheme to pay the Annual Allowance charge on your behalf, e.g. by 31 January 2018 for tax year 2016/17. You’ll also need to inform Teachers’ Pensions of your scheme pays election by 31 July 2018.

    The notification you give must be in writing or via our form. You must sign and date your notification if you make it in writing. You can access a Scheme Pays form here.

    If you think that you may want to ask the Teachers' Pension Scheme to pay your Annual Allowance charge, you should approach the Scheme as early as possible, so that you have plenty of time to consider what this means for your future pension benefits.

    If you haven't received a Pensions Savings Statement you can request one from us, or you can use the HMRC website to estimate the growth in your benefits. You can amend your tax return when you receive accurate figures, if this is within 12 months of submitting your original tax return. It’s important that you don’t delay making your scheme pays election as you may have to pay a substantial lump sum to HMRC.

    For further information please see the 'Pension and tax' section of our website.

  • What is the Lifetime Allowance?

    The Lifetime Allowance (LTA) came into effect on 6 April 2006. The LTA is the total value of any pension savings that you can have at retirement without incurring a tax charge. The total amount that you need to consider includes your pension savings from all your pension schemes, but excludes your state pension.

  • How much is the Lifetime Allowance?

    The Lifetime Allowance (LTA) for most people is £1.25 million in the tax year 2015-16 (reduced from £1.5 million in 2013-14). It applies to the total of all the pensions you have, excluding your State Pension.

    To value your Teachers’ Pension Scheme benefits against the LTA you should multiply by 20 every £1 of annual pension that will come into payment. You then need to add the value of any retirement lump sum to this capitalised value. Follow this example for more information:

    A member with a pension of £80,000 per annum and an automatic lump sum of £240,000 would have their benefits valued against the LTA as follows:

    Value of pension: £80,000 per annum x 20 = £1,600,000 (A)

    Value of lump sum = £240,000 (B)

    Total value of benefits = £1,840,000 (A+B)

    This would represent a value of 147.22% of the LTA where the LTA is £1.25 million. The amount by which the benefits exceed the LTA, or protected LTA, is known as the “chargeable excess”.

  • What counts towards my Lifetime Allowance?

    The Lifetime Allowance is the total value of benefits that all your pension providers promise to give you when you retire, but excluding your state pension or any dependant’s pension that you’re receiving.

  • How is the Lifetime Allowance Charge (LTA) calculated and how could it affect my pension?

    If the value of benefits at retirement exceeds the LTA in a relevant tax year, the value of benefits in excess of the LTA will be taxed accordingly, unless you’re entitled to transitional protection.

    For the purposes of valuing benefits against the LTA, every £1 of annual pension coming into payment is multiplied by 20. The value of any separate (automatic) lump sum is added to this capitalised value.

    As an example, a member taking a pension of £50,000 per annum with an automatic lump sum of £150,000 would have their benefits valued against the LTA as follows:

    Value of pension:

    £50,000 per annum x 20 = £1,000,000

    Value of lump sum = £150,000

    Total value of crystallised rights = £1,150,000

    This would represent a value of 115.00% of the LTA assuming the LTA is £1 million (1,1500,000/£1,000,000).

    The amount by which the benefits exceed the LTA or protected LTA is known as the chargeable excess. The Teachers’ Pension Scheme does not permit the chargeable excess to be paid as a LTA Excess Lump Sum taxable at 55%.

    In our example the value of benefits in excess of the LTA is £150,000. This will be paid as pension and thereby subject to a tax rate on the excess of 25%. The member and the scheme are jointly and severally liable for the LTA charge.

    The charge is paid by the Teachers’ Pension Scheme to HM Revenue and Customs (HMRC). The member's pension is then reduced to recover (in instalments) the charge paid by the Scheme The factors as well as being age specific are also dependent upon whether the retirement event is taken under ‘normal health’ or ‘ill health’ conditions.

    The amount of the reduction on account of the LTA =

    Amount of the tax / an age (and health) specific factor

    If we continue with our example, and assume that the member is a NPA 60 member (in normal health) at age retirement with no transitional protection (Primary, Enhanced or Fixed protection) he will be liable to an LTA charge of :

    £150,000 x 25% = £37,500.

    Teachers' Pensions will pay this tax charge directly to HMRC on his behalf.

    In order to recover this charge from the member, an annual reduction in the member's gross pension will be applied by dividing the amount of charge paid by Teachers' Pensions by the relevant factor (the normal health factor for a member 60 attained is; 19.66):

    £37,500 / 19.66 = £1,907.43 per annum for the whole of the member’s life.

    Subsequent Pensions Increase will then be applied to the pension after allowing for the LTA deduction.

    * For the latest factors see www.teacherspensions.co.uk/members/resources/factors


  • What if I had a pension in payment before 6 April 2006?

    If you had any pensions already in payment at 6 April 2006 they will not be affected unless you draw further pension benefits after 6 April 2006.

  • Who is potentially affected by the reduction in the Lifetime Allowance?

    If the value of your accrued benefits in the Teachers’ Pension Scheme and other arrangements exceeds £1 million, you may be subject to an Lifetime Allowance (LTA) charge. Members with a current LTA value of benefits equal to approximately 80% of the LTA of £1 million are particularly at risk of incurring an LTA charge, to which they would not previously have been subject.

    A member who takes retirement benefits on or after 6 April 2016 will have their pension benefits assessed under the reduced LTA, unless they hold a valid transitional protection certificate from HM Revenue and Customs (HMRC).

    If you intend to take benefits on or after 6 April 2016, it may be possible to protect your benefits from the LTA charge by applying for Individual Protection from HMRC, subject to certain conditions.

  • Can I protect my pension from a Lifetime Allowance charge?

    It’s sometimes possible to protect yourself from Lifetime Allowance charges where the Lifetime Allowance has been reduced.

    The protection rules are complicated and to find out more about how the Lifetime Allowance works please go to the HM Revenue & Customs website. There is a tool on their website that  can help you decide whether to apply for protection. Use the HMRC Lifetime Allowance checker

    You should consider if you need professional financial advice before deciding whether to apply for protection and when to take your benefits. Please note that Teachers’ Pensions are unable to provide advice.

  • When are my pension savings compared against the Lifetime Allowance?

    Every time any of your pension schemes start to make payments to you, the value of that new payment is compared against your remaining LTA to see if there is any additional tax to pay. You can work out whether you’re likely to be affected by adding up the expected value of your pensions.

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