Pensions & Tax
Pensions & Tax
Your pension contributions are not taxed and you will only pay tax on your pension once it comes into payment. However there are tax limits on how much pension you can build up in a year (Annual Allowance) and how much tax-free cash you can take (Lump Sum Allowance and Death Benefit Allowance).
Annual Allowance
Annual Allowance is simply a limit on how much pension you can save in any one year before you pay a tax charge. The Annual Allowance limit for most members is £60,000 per year (higher earners, over £260,000 per year, may have a lower allowance). Most members are not affected by the Annual Allowance limit.
Annual Allowance covers all pension benefits you have, in any, and all pension schemes you have paid into over the financial year. It includes both the contributions from yourself and your employer.
The Fund will write to any members whose Local Government Pension Scheme (LGPS) benefits are close to or exceed the Annual Allowance limit. If you have a pension with another Pension Scheme or provider (excluding the state pension) you must add all your pensions together to see if you have exceeded the Annual Allowance. It is your responsibility to monitor whether or not you exceed the limit.
Find out more in the Annual Allowance factsheet below.
Lifetime Allowance
Lifetime Allowance was the total value of all pension benefits you could have without triggering a tax charge. The Lifetime Allowance was abolished, and no longer applies from 6 April 2023.
Lump Sum Allowance and Lump Sum Death Benefit Allowance
From 6th April 2024, the Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA) replaced Lifetime Allowance to restrict the payment of tax-free cash.
At retirement, the restrictions apply to your Pension Commencement Lump Sum (PCLS). Your PCLS is made up of any Local Government Pension Scheme (LGPS) lump sum and any Additional Voluntary Contribution (AVC) funds you are taking as tax-free cash. There are two new tax restrictions which can apply to PCLS:
- The LSA is a personal lifetime limit of £268,275 for the payment of tax-free cash at retirement. Once this is exceeded, any lump sum allowance over this limit will be taxed at the member’s marginal rate of income tax.
- The LSDBA limits the amount of tax-free cash that can be paid when a member dies. The LSDBA limit is £1,073,100 million (it is also reduced by any LSA used). Once this is exceeded, any lump sum allowance over this limit will be taxed at the member’s marginal rate of income tax.
The maximum PCLS a member can take is the lower of the two options:
- 25 per cent of the capital value of pension
- their available LSA
Most members will not be affected by these regulations.
The LSA and LSDBA are very complex so please contact the Fund if you have any queries.
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