Annual Allowance Questions Answered | Standard Life

Are you confused about the pension annual allowance? Retirement expert Scott McQueston is here to answer your questions in this informative article.

Introduction

The pension annual allowance can be a confusing topic for many people. What is it? How does it affect your pension plan? Can you still make payments if you’ve already accessed your pension money? In this article, we’ll dive into all of these questions and more. With the help of retirement expert Scott McQueston, we’ll provide you with all the answers you need to understand the pension annual allowance.

What is the Annual Allowance?

The pension annual allowance is the maximum amount that can be paid across all your pension plans in a tax year before a tax charge applies. This includes your payments into your plan, employer payments, and third-party payments. The amount is capped at £60,000 gross and is 100% of your ‘relevant UK earnings’. Your employer payments are not always limited to your relevant UK earnings but are still subject to the annual allowance.

Does the £60,000 apply to everyone?

No, it doesn’t. If you earn less than £3,600 or you’re a non-earner, then your annual allowance will typically be £3,600 gross. High earners may have the tapered annual allowance, which can reduce your allowance to as low as £10,000 per tax year, depending on your earnings. This affects people who have an ‘adjusted income’ of over £260,000. You can calculate your adjusted income on the GOV.UK website.

Can I Make Payments into My Pension Plan If I’ve Already Started Accessing My Pension Money?

Yes, you can. In fact, recent changes from the Spring Budget have increased your opportunity to save for retirement. The money purchase annual allowance, which is triggered when you take taxable money from a defined contribution pension plan, has increased from £4,000 to £10,000 per tax year. Keep in mind that your relevant UK earnings need to be at least £10,000 to support this.

Does the Money Purchase Annual Allowance Kick in If I Only Take My 25% Tax-Free Lump Sum?

Not typically, but it depends on how you’re taking your money. If you plan to eventually take the rest as a flexible income (drawdown), you can take a tax-free lump sum without triggering the money purchase annual allowance. If you take a 25% tax-free lump sum and use the rest to buy a lifetime annuity, you usually won’t trigger the money purchase annual allowance.

Can I Take Money from My Old Pension Plans Without Affecting How Much I Can Pay into My Current One?

Yes, you can, as long you’re only taking your tax-free entitlement from your old plans. Or some people take pension pots under ‘small pot rules,’ letting them take up to three personal pension pots worth less than £10,000 as lump sums without affecting their annual allowance. However, if you start taking taxable money from your old plans, this usually reduces your allowance to £10,000 and affects how much you can save in your current plan.

What Counts towards Your Annual Allowance?

All payments, including employer payments, payments from you, or third-party payments, count towards your annual allowance. Tax relief will also be added at the basic rate of 20% when you pay into your plan. For instance, if you want £1,000 paid in, it’d cost only £800 as £200 gets added as tax relief. Thus, £1,000 gross counts towards your annual allowance.

Related Facts

– The pension annual allowance can be complex and affect individuals differently, so it’s essential to seek professional advice if you’re unsure.
– The annual allowance is just one factor to consider when planning for retirement, and it’s vital to think about your retirement lifestyle expenses and what income you’ll need in retirement.
– Tax rules can change quickly, so it’s essential to stay informed and adjust your retirement planning strategies accordingly.

Key Takeaway

Understanding the pension annual allowance and how it can affect your retirement planning is critical. It’s essential to know your options and seek professional advice if you’re unsure. Remember that the annual allowance applies to all your pension plans, and it’s just one factor to consider when planning for retirement.

Conclusion

In conclusion, Scott McQueston has answered your questions on the pension annual allowance in this informative article. The annual allowance is a complex topic, but with the right information, you can make informed decisions about your retirement planning. Remember to seek professional advice and stay informed about any changes in tax rules that may affect your retirement plans.