Annual and Lump Sum Allowances

HMRC limits the value of benefits and/or contributions that you can build up each year in a tax-efficient way. If you are a 'deferred' or 'employed deferred member', the value of your Scheme benefits are tested against the Annual Allowance. The value of your Scheme benefits should be taken into account if you are a high earner, if you have other Defined Benefit pensions or if you are still contributing to other pensions.
Details can be found here:
https://www.gov.uk/tax-on-your-private-pension/annual-allowance

You can normally take up to 25% of the value of your Scheme benefits as a tax-free lump sum. Previously, HMRC also applied a Lifetime Allowance (LTA) which limited the total value of tax-favoured pension benefits you could build up from all UK pension schemes. This was abolished on 6 April 2024, and under the new rules, it is only these tax-free lump sums, and not income, which are assessed against the new allowances.

The restrictions that apply to tax-free lump sums are:

• The Lump Sum Allowance which restricts the tax-free lumps sums taken when you retire.
  
  
• The Lump Sum and Death Benefits Allowance which restricts all tax-free lump sums you or your beneficiaries can receive. This includes those taken when you retire, and lump sum paid on serious ill-health or following death. This Allowance is £1,073,100 (or your LTA at 5 April 2024 if higher).

Find out more here: www.gov.uk/tax-on-your-private-pension/lump-sum-allowance

At retirement, the value of your total pension savings will be checked against the Lump Sum Allowance (LSA). The value of any defined benefit pension (e.g. your Scheme pension) is calculated for this purpose as your total annual pension, multiplied by 20, plus the value of any other pension savings.

The LSA will take into account not only your Scheme pension but also the benefits you have built up in all other pension schemes. Few people will be affected by the LSA but it is your responsibility to keep track of all your pension benefits building up over your working life. This information must then be provided before retirement to confirm that your pension does not exceed the LSA.

When you come to retire, if your pension benefits from all registered pension plans have a total value which exceeds the LSA, the excess value will be taxed at an effective rate of 55%. It is important that you tell the WTW Administration Team about pension benefits built up in previous or other co-existing pension arrangements.