Budget basics - busting the pension jargon
Whether you’re 4 or 40 years away from retirement, it’s important to understand how tax can impact your pension savings. Here, we’ve simplified what each tax term means and how much the allowance is.
Annual allowance
The annual allowance is the total amount that can be saved into your pension or pensions (if you have more than one pot) each year before you’ll have to pay an additional tax charge.
This allowance is £60,000.
Money purchase annual allowance
If you access any taxable money from your pension(s), then you may see your annual allowance reduce. This is known as the money purchase annual allowance. This means once you’ve accessed your pension, you can still pay more money into it but at a lower level before you pay tax.
This allowance is £10,000.
Lump sum allowance
When you access your pension, you can usually take up to 25% of it as a tax-free lump sum. The lump sum allowance is the maximum amount of money you can take as tax-free lump sums from all the pensions you have before you’ll have to pay an additional tax charge.
This allowance is £268,275.
This allowance will be higher if you have any protected tax-free lump sums, or a protected lifetime allowance.
Lump sum and death benefit allowance
This is the total amount of tax-free money you can take across all the pensions you have both in your lifetime and on your death. Depending on your circumstances there are different ways you can take your tax-free money. See our Tax Year Rates and AllowancesOpens in new tab for further information.
This allowance is £1,073,100.
This allowance will be higher if you have any protected tax-free lump sums, or a protected lifetime allowance. Tax will need to be paid on any funds paid above this allowance, by whoever receives the payment.
Overseas transfer allowance
If you live abroad, this is the maximum amount you can transfer from any registered UK pension schemes you have, to any Qualifying Recognised Overseas Pensions Schemes.
This allowance is £1,073,100.
A 25% overseas transfers charge will be taken from any transfers made over this amount.
A 25% charge will also be due if you don’t transfer your pension to a scheme located in the same country in which you reside.
Please visit Tax Year Rates and AllowancesOpens in new tab for the latest list of tax rates and allowances. To help you understand any tax implications, you should speak to a financial adviser. You can find one in your local area at unbiased.co.ukOpens in new tab. Advisers usually charge for their services.