Want to know what the current tax year rates and allowances are? Please read the Tax Year Rates and Allowances Sheet (PDF: 271KB) where you can see the figures for the current and previous tax year.
You can use some or all of your pension pot to buy an annuity that provides you with a guaranteed income either for life or a fixed period. Your annuity income is taxable as income but you can normally take 25% of your pot tax-free before using the rest to buy an annuity.
There are different types of annuities
This is the maximum amount set by HM Revenue & Customs (HMRC) that can be saved into a pension each year without incurring a tax charge. It includes contributions paid by your employer and anyone else on your behalf. Below this maximum amount you'll receive tax relief on your personal contributions as long as the total of those contributions are also within your yearly earnings. The Annual Allowance applies to all pension schemes that you belong to, including any defined benefit schemes.
The period over which the allowance is measured is called a Pension Input Period, the period usually aligns with tax years, from 6 April to 5 April the following year.
If you go over the Annual Allowance you will pay tax on the amount above it. The amount you pay is based on your highest marginal rate of income tax.
You may also be able to carry forward any unused allowances from up to three previous tax years.
Please also see 'Money Purchase Annual Allowance' if you have accessed your pension pot.
You will be automatically enrolled if you're:
The Qualifying Earnings upper and lower limits are set by the government and are the earnings on which the minimum contributions for automatic enrolment are calculated. Your employer will tell you the earnings on which your contributions are based.
All employers must automatically enrol their employees into a workplace pension scheme subject to certain eligibility criteria. Although you may opt out, they must re-enrol you every three years to encourage you to start saving into your pension pot. You will have the right to opt out again.
You can take some or all of your pension pot as a cash lump sum from age 55. Normally 25% of each lump sum you take will be paid tax-free and the remainder will be taxable as income.
Drawdown is a way of taking a taxable income from your pension fund. Historically the amount that most people were able to take in this way was limited to a percentage of an estimated annuity that's calculated using government rates.
Since April 2015 people have had more freedom about how and when they can take an income direct from their pension pot. Whilst any existing capped drawdown can continue beyond 6 April 2015, anyone wishing to start drawdown from this date will be taking Flexi-Access Drawdown.
A personal or workplace pension where contributions and investment performance dictate how much money you have available to provide an income for retirement. Also referred to as ‘money purchase’ schemes as whatever pot you have built up can be used to purchase an annuity.
Since April 2015 people have had more freedom to take an income direct from their pot as and when they want or need it.
Flexi-Access Drawdown is a way of taking an income from your pension fund without having to buy a pension annuity. Pension freedoms introduced in April 2015 have given people more flexibility over how much they can draw down from their pension pot from age 55. Income is taxable and can be taken on a regular or occasional basis with the rest of your pot remaining invested.
Not all pension schemes and providers offer Flexi-Access Drawdown and those that do are likely to charge to use the facility and may have a minimum pot size requirement. You have the right to transfer your pot to another scheme or provider.
Any amount you personally pay into a pension scheme is free of income tax as long as it’s within 100% of your annual earnings, and within the Annual Allowance.
This is called Income Tax Relief, and the amount you are entitled to will depend on the rate of tax you pay and may also depend on which country you live in within the UK. The way this works will be set by your employer and depends on the type of scheme, as the government offers two choices:
Relief at source
This is where your employer deducts your contribution from your earnings after tax, and your pension scheme gives you back tax at the basic rate. For example, if you have agreed to pay £100 a month (gross) into your pension, you only need to pay £80 from your take home pay.
Your scheme will then add £20 to this (using the current basic rate of income tax of 20%) bringing the total to £100.
However, if you pay tax at a higher rate, you'll need to claim the rest back on your self-assessment return as the scheme is not allowed to claim back more than the basic rate.
If you don't pay income tax because you're on a low income, you will still get income tax relief on the first £3,600 you pay into a pension each tax year.
This is where your employer deducts your contribution from your earnings before tax. This means that you don't pay any upfront tax on your pension contribution at all. By using this method, the tax relief automatically applies at your highest rate of tax straight away.
An Individual Savings Account (ISA) is a tax-efficient savings plan. The government sets limits on the amount you can save into an ISA each year.
There are two ways to put your money into an ISA: cash or investment in stocks and shares.
Cash ISAs are simply savings accounts where the interest isn't taxed, and most Cash ISAs offer the same level of security for your money as a building society, or bank deposit account.
Stocks and Shares ISAs let you save money in a range of investments, such as shares, Unit Trusts, Open Ended Investment Companies (OEICs) and Investment Trusts. In a Stocks and Shares ISA your investment can go down as well as up, returns are not guaranteed and you may get back less than you invest.
If you are eligible you can receive a Joint State Pension from the government at State Pension Age, if you are married or in a registered civil partnership.
This is a limit on the total amount of pension savings that you can build up in all your pension arrangements before you have to pay a tax charge. This is called the Lifetime Allowance.
For most people their Lifetime Allowance will be the Standard Lifetime Allowance. Certain circumstances may mean you have a different personal Lifetime Allowance – these are known as fixed, primary, enhanced or individual protection and you will have completed an HMRC election form if they apply to you.
If you go over the Lifetime Allowance, anything over this amount will be taxed and the rate of tax is different depending on whether you choose to take it as cash or provide yourself with an extra pension income.
If you choose to use it to provide yourself with an extra pension income, the income will also be taxed at your marginal rate of income tax.
It is important to be aware that the Lifetime Allowance may reduce in the future, and you may be entitled to a higher Lifetime Allowance if you have received a certificate confirming this from HMRC.
Please see ‘Defined Contribution (Pension) Scheme
If you take cash or income directly from your defined contribution (or money purchase) pot other than as tax-free cash or cashing in a small pot of £10,000 or less (subject to a maximum of three small pots from personal pension schemes), your annual allowance for money purchase benefits will reduce.
This is called the ‘Money Purchase Annual Allowance’ (MPAA), and you will also lose the ability to carry forward any unused MPAA from previous tax years. You’ll be told if this applies to you at the time you withdraw any money from your pot.
If you have a MPAA, you will need to tell all other pension schemes that you’re still building up benefits in within 91 days from when you’re first told it applies to you. If you join any new schemes in the future, you’ll have 91 days from when you join to tell them that you have a MPAA.
Please see ‘Annual Allowance’.
The Pension Credit consists of two parts, a 'Guaranteed Credit' or income and a 'Savings Credit' for singles and couples:
You can find more information on the Pension Credit on the government website.
Government regulations about defined contribution pension schemes mean people have more freedom over how they can access their pension pot.
You can normally take up to 25% of your pension pot as a tax-free lump sum and with the remaining 75% you can:
From age 55, you can choose how and when to access your pot, including using a combination of the above options. Your pot will remain invested until it has been used up or transferred to another provider. Different providers will offer different options, features, rates of payment, terms and charges.
When you come to access your pension pot, free and impartial guidance is available to you from an independent government service called Pension Wise to help you understand your options.
Relevant UK earnings are earnings that are subject to UK tax. If you are a UK taxpayer, you're able to pay up to 100% of your annual earnings each year into a pension scheme and get tax relief on what you pay in up to the Annual Allowance (see Annual Allowance for more details).
It is worth noting that even if you aren't a UK taxpayer but you are a UK resident, you're still able to pay up to a certain amount into a pension scheme each year and still receive tax relief.
Your pay has to be above the Annual Primary Threshold for National Insurance in order for National Insurance to be taken from your pay.
National Insurance will be deducted from your pay whether you are paid on a weekly, four-weekly or monthly basis.
If you are eligible you can receive the Basic State Pension from the government when you reach State Pension Age. Your State Pension age will depend on your date of birth. You can find out more information on the State Pension and State Pension Age on the government website.
The Additional State Pension has been replaced with a single flat rate State Pension since 6 April 2016. It's only available for people in employment and the amount depends on your earnings while you are employed, and the national insurance contributions you've paid.
It is also often called the State Second Pension, and was previously known as the State Earnings Related Pension Scheme (SERPS). The government has announced that the Additional State Pension will stop for people reaching State Pension Age and be replaced with a single flat rate State Pension after 6 April 2016.
You can find more information on the Additional State Pension on the government website.
The tax year runs from 6 April to 5 April of the following year.
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