Background Limits on tax relief
20.Since A-day, there have been no limits on the amount of pension savings an individual can have, but there are limits on the amount of tax relief that is available: these are the lifetime allowance and the annual allowance.
21.The lifetime allowance is the maximum amount of pension and/or lump sum that an individual can take from their pension schemes that benefits from tax relief. There is no limit on the amount of benefits that a pension scheme can pay an individual. The standard lifetime allowance is £1.25m for tax years 2014-15 onwards. Where the value of pension benefits taken (known as benefit crystallisation events or BCE) exceeds the lifetime allowance, the lifetime allowance charge applies to the excess. The rate of the lifetime allowance charge will depend on how the individual takes their benefits.
	Any amount over the lifetime allowance taken as a lump sum is taxable at 55%.
	Any amount over the lifetime allowance taken as a pension is taxable at 25%. The pension will also be taxable at the recipient’s marginal rate.
22.There is also a limit on the amount of annual pension savings that benefits from tax relief. This is the annual allowance. The annual allowance is £40,000 for tax year 2014-15 onwards. Any unused annual allowance in respect of an individual can be carried forward from the three previous tax years and added to the £40,000, to make the individual’s annual allowance for that tax year.
23.How pension savings are measured against the annual allowance depends on the type of arrangement. The pension savings for each arrangement are known as the pension input amount and the sum of all these amounts in respect of an individual is the total pension input amount. If an individual’s total pension input amount is more than their annual allowance they will pay a tax charge on the excess over their annual allowance. This tax charge is called the annual allowance charge and is charged at the individual’s marginal rate.
24.For most money purchase arrangements, the pension input amount is the total contributions made by the individual or anyone else on their behalf, including any made by any employer. The exception to this is where the arrangement is a cash balance arrangement where the pension input amount is the increase in the promised fund for the individual. For a cash balance arrangement the pension input amount could, for example, be the amount an employer has promised to provide for an employee, but without making a contribution to fulfil that promise until many years later.
25.However, in defined benefit arrangements, individuals accrue a right to an amount of annual pension from pension age based on a variety of factors, for example years of service or salary. To treat the two in a comparable way, a deemed notional contributions value is applied to the increase in value of pension rights between the start of the year and the end of the year. For defined benefit arrangements, the pension input amount is therefore calculated by multiplying the increase in their expected pension over the course of the year by a factor of 16. This broadly means that an increase in annual pension benefit of £1,000 would be deemed to reflect a contribution of £16,000.
26.Where an individual has a hybrid arrangement, as defined in section 152 Finance Act 2004, it is more difficult to calculate a comparable contribution value because the type of benefits provided are not decided until they are taken. In the circumstances, the pension input amount is worked out by calculating what would be the value of the pension input amount for each type of benefit that could be provided from the hybrid arrangement, and taking the highest of these values.