The LA is the maximum amount of money an individual is allowed to build up in pension savings over his or her lifetime. If the total capital value of those savings — which includes occupational pension schemes and any other form of pension — exceeds £1.8 million (tax year 2010/11) the balance will be subject to a ‘recovery’ charge when the individual retires. Her Majesty’s Revenue & Customs (HMRC) applies recovery charges on the grounds that any amount above the LA has benefited unduly from the tax advantages associated with pension savings. If the excess is taken as a lump sum, then a 55% charge applies: if it is used to provide pension income, a 25% charge applies. (N.B. From April 2012, the LA will be reduced to £1.5m.)
The Annual Allowance (AA)
The AA is the maximum amount an individual, or their employer, or both, is allowed to contribute to a pension (or pensions) and still claim tax relief on the contributions. For the tax year 2010/11, the AA is £255,000, reducing to £50,000 in tax year 2011/12. Although there is no limit on the amount that can be contributed to a pension scheme, there is a limit on the amount of tax relief that can be claimed each year. If the AA is exceeded, the excess may be subject to a tax charge, although the charge may be reduced or eliminated if an individual has unused allowances which can be carried forward from previous years and offset against the current year’s tax charge. The AA does not apply in the year of an individual’s death, where a person has 12 months or less to live, or the individual is a ‘deferred member’ and no longer building up benefits.