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What is the annual allowance?

The Annual Allowance (AA) is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. This is in addition to any income tax you pay on your pension once it is in payment. If the value of your pension savings in any one year (including pension savings outside of the Scheme) are in excess of the annual allowance, the excess will be taxed as income. The annual allowance is set by HM Treasury and is currently £40,000 (2016/17).

How is the annual allowance calculated?

The increase in the value of your pension savings in the Scheme in a year is calculated by working out the value of your benefits immediately before the start of the 'pension input period', adjusting the value by the cost of living and then comparing it with the value of your benefits at the end of the 'pension input period'. The 'pension input period' (PIP) is the period over which your pension growth is measured. From 6 April 2016, PIPs for all pension schemes are aligned with the tax year - 6 April to 5 April. The value of your pension benefits is calculated by multiplying the amount of your annual pension by 16 and adding any lump sum you are automatically entitled to from the Scheme plus any AVCs you or your employer has paid during the year. If the difference in the value of pension benefits at the end of the PIP less the value of your pension benefits immediately before the start of PIP (adjusted for inflation), is more than the AA then you may be liable to pay a tax charge.

The annual allowance quick check tool

Before you start
You can use this check tool to check if your pension saving in the Scheme in a tax year (from 2016/17 forward) is likely to exceed the annual allowance.

You will need to input the value of your Scheme pension benefits (including AVCs) at the start of the pension input period and at the end. The pension input period runs from 6 April to 5 April. If you wish to use the pension figures provided on your annual benefit statements please note that the results will not be completely accurate. The reason for this is that the pension input period runs from 6 April to 5 April whilst the Scheme year runs from 1 April to 31 March. Whilst using the figures on your annual benefit statement can provide a good estimate of your pension growth, if you think you are near to, or likely to exceed the annual allowance in any tax year, you should contact us for more accurate information.

You cannot use this check tool:
  • to check if you have unused annual allowance prior to 2016/17 which can be carried forward to avoid or reduce an excess tax charge
  • to check the amount of annual allowance used in other pension schemes
  • if you earn more than £110,000 per year (from all sources of income that are taxable e.g. income from property, savings, pensions, social security (where taxable), state pension etc.)
  • if you have flexibly accessed pension benefits from another pension scheme (you will be issued with a flexible access statement by the scheme if you do)
  • if you have transferred pension rights into the Scheme in the tax year you are checking
  • if you have aggregated previous Scheme benefits with your current pension account in the tax year you are checking

If any of the above circumstances apply please refer to the annual allowance factsheet or contact us.