Pensions and tax considerations

Members of pension schemes in the UK enjoy tax relief on both their pension contributions and on cash lump sums taken at retirement. Pension income, however, is taxed as earned income under the PAYE system.

This preferential tax treatment is the government's way of incentivising individuals to save towards their retirement, but there are limits to their generosity. There are restrictions on the maximum tax-free benefit you can build up in any single year and the maximum tax-free benefits you can draw at retirement.

Limits (allowances)

There are three different limits that apply:

1. Annual allowance - a restriction on the amount of benefits you can build up in a single year and still benefit from tax relief

2. Lifetime allowance – a restriction on the maximum amount of benefits you can earn up to retirement in a tax-beneficial way

3. Maximum tax-free cash – a limit to the amount of tax-free cash you can receive at retirement. This is expressed as a percentage of the value of the benefits you have earned with an absolute maximum

Annual allowance

 
This limit is expressed as a capital value. For the 2017-18 tax year the limit is £40,000. It's the capital amount by which your pension benefits have grown during a pension input period (PIP).
 
For USS, the PIP is 1 April to 31 March each year.
 
Generally speaking, the more service you have and the larger your salary, the more likely it is you'll exceed the annual allowance.
 
This table will give you an indication of whether you may exceed the annual allowance:

• 2015-16 Annual allowance guidance (.pdf)

 Lifetime allowance

The lifetime allowance limits the overall amount of tax-free retirement benefits you can build up. It's expressed as a capital value.For the 2015-16 tax year the limit is £1.25 million. This table will give you an indication of whether you may exceed the lifetime allowance.

2015-16 Lifetime allowance guidance (.pdf)

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The Pensions Team If you have any queries about your pension please email us.