Annual & Lifetime Allowances

Annual & Lifetime Allowances

The annual allowance and lifetime allowance are two limits that apply to the amount of money that can be contributed to a pension scheme in the UK without incurring additional tax charges. These limits are designed to ensure that the tax benefits of saving for retirement are not overly generous and to prevent people from accumulating very large pension funds.

The annual allowance is the maximum amount of money that can be contributed to a pension scheme each year without incurring additional tax charges. The annual allowance for the 2021/2022 tax year is £40,000. However, the annual allowance may be reduced if an individual has a high income and/or if they have already started to draw down their pension savings.

The lifetime allowance is the maximum amount of money that can be held in a pension fund over an individual’s lifetime without incurring additional tax charges. The lifetime allowance for the 2021/2022 tax year is £1,073,100. If an individual’s pension fund exceeds the lifetime allowance, they may be required to pay a tax charge on the excess amount.

It’s important to note that these limits apply to the total amount of money contributed to all of an individual’s pension schemes, including both defined benefit and defined contribution schemes. If an individual exceeds either the annual allowance or the lifetime allowance, they may be required to pay additional taxes on their pension savings.