The annual allowance is the amount by which the capital value of your pension benefits can increase in a tax year (your ‘pension savings’) without you having to pay a tax charge. For most people, because the value of their pension savings won’t increase in a year by more than £40,000 (the annual allowance), their pension savings won’t attract a tax charge, or, if they do, they are likely to have unused allowance from previous years that can be carried forward to offset their excess savings.
We work out your annual allowance by comparing the capital value of the pension and lump sum you had at the beginning of the tax year, which we adjust for the effect of inflation, against the capital value of the pension and lump sum you hold at the end of the tax year. The capital value is calculated as your pension times 20 plus your lump sum. The adjustment for inflation is any increase in the Consumer Prices Index (CPI) in the September before the tax year started.
If your pension savings exceed the annual allowance, then we’ll send you a pensions savings statement by 6 October following the end of the tax year. Exceeding the annual allowance can happen even if you are on a moderate income but, generally, this will only happen if you have worked a lot of overtime compared to the previous tax year and you have pensionable service from before 1 April 2014.
If you do receive a statement, you should first check if you have sufficient carry forward to offset your excess savings. But don’t worry we’ll also give you the name and contact details of a person who will be able to talk you through your statement and explain why you’ve exceeded the annual allowance if you want to speak to someone about your pension savings.