Tax and Pensions

At a Glance

✓ Most members will not be affected by these allowances.

✓ Unused allowance from the previous 3 tax years may be carried forward.

✓ We will contact you if the growth in your LGPS benefits exceeds the standard Annual Allowance.

✓ The allowances may apply if you have substantial pension benefits across multiple pension schemes.

HM Revenue & Customs (HMRC) sets the rules for pension savings. There are two main pension allowances: the Annual Allowance and the Lump Sum Allowance. The information below provides an overview of the rules governing the taxation of pension savings. The regulations are complex, and the information below is a summary only.

If you are unsure about the best course of action, we recommend that you obtain specialist financial and tax advice, as Gwynedd Pension Fund staff cannot provide this for you.

Annual Allowance

Watch the short video below to understand how the Annual Allowance works.

 

The Annual Allowance (AA) is the limit on how much the value of your pension benefits can increase in a tax year before a tax charge may become payable.

The standard Annual Allowance has been £60,000 since 6 April 2023. Before that, it was £40,000.

When assessing whether you have exceeded the limit, the growth in all your pension savings across all pension schemes must be taken into account.

Will this affect me?

Most members will not be affected by the Annual Allowance. Even if the growth in your pension benefits in a tax year exceeds the limit, you may be able to use unused allowance from the previous three tax years under the carry forward rules.

Could the Annual Allowance affect me?

The LGPS Quick Check Tool can help you assess whether the Annual Allowance may apply to you.

Use the Annual Allowance Quick Check Tool →

What is carry forward?

The carry forward rules allow you to use any unused portion of your Annual Allowance from the previous three tax years.

For example, if you exceeded the Annual Allowance by £10,000 in a tax year but had £15,000 of unused allowance carried forward from the previous three tax years, no tax charge would be payable.

Who is most likely to be affected?

  • People with a large amount of pension membership or benefits in the scheme.
  • Members who receive a significant pay increase or promotion.
  • Higher earners.
  • Members who have taken flexible benefits from another pension scheme on or after 6 April 2015.

What if I exceed the limit?

If the total growth in your pension benefits exceeds your available Annual Allowance, the excess will usually be taxed as income at your highest marginal rate of tax.

If this applies to you, you must declare the charge on your Self Assessment Tax Return, even if the scheme pays the charge on your behalf.

Can the scheme pay the tax charge?

If your Annual Allowance tax charge is more than £2,000 and your pension savings in the scheme have increased by more than the Annual Allowance during the tax year, you may be able to ask the scheme to pay some or all of the charge on your behalf.

Any amount paid by the scheme will be recovered from your future pension benefits.

Important: If you want the scheme to pay the tax charge on your behalf, you must notify us by 31 July in the year following the end of the relevant tax year.

How will I know if I have exceeded the limit?

Gwynedd Pension Fund will notify you if the growth in your LGPS benefits exceeds the standard Annual Allowance in any tax year.

This will normally be by 6 October in the following tax year.

Lump Sum Allowances

From 6 April 2024, the Lifetime Allowance was replaced by three new allowances:

  • Lump Sum Allowance (LSA) – £268,275. This limits the total tax-free lump sums you can take across all your pensions.
  • Lump Sum and Death Benefit Allowance (LSDBA) – £1,073,100. This limits certain tax-free lump sums and death benefits.
  • Overseas Transfer Allowance (OTA) – £1,073,100. This limits the tax-free value of transfers to Qualifying Recognised Overseas Pension Schemes (QROPS).

Already taken pension benefits?

If you took a lump sum or used part of your Lifetime Allowance before 6 April 2024, this may reduce the amount of LSA and LSDBA available to you today.

Will this affect me?

Most LGPS members will not be affected by these allowances.

However, they may apply if you have substantial pension benefits across one or more pension schemes.

Important: If you are unsure how much of your Lifetime Allowance was used before 6 April 2024, you should check your pension records or seek independent financial advice.