Annual allowance

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What is Annual Allowance?

The Annual Allowance (AA) is the amount by which the value of a member's pension benefits may increase in a year without incurring a tax charge.

If the increase in the value of the member's pension benefits in a year (including any pension savings or increase in pension benefits outside of the LGPS) is more than the Annual Allowance, the excess will be taxed as income.

How is the Annual Allowance calculated?

As the LGPS is a Defined Benefit (DB) scheme, then the increase in the benefits is measured as:

Pension at end of year less pension at start of year (plus CPI) x 16

Plus lump sum at end of year less lump sum at start of year (plus CPI)

Plus any in house AVC pension contributions (employee and employer)

Note: It is therefore very important that we receive accurate pay information as this will have an impact on figures calculated, with possible tax implications for the member.

Points to note that can impact the Annual Allowance

  • Large pay increase in the year, especially if they were a member of the scheme prior to 1 April 2014, with benefits built up in the final salary section
  • Paying a high level of additional contributions
  • High earners
  • Transferring in pension benefits from another public sector pension scheme which retains a final salary link, or combining of previous LGPS membership where there has been an increase in pay.

Temporary promotion, acting up pay or even overtime can also have an impact and it would be in the interest of the member to point this out to them before they consider undertaking any additional responsibilities.

The Annual Allowance factsheet provides useful information, or the member can contact Surrey Pension Services to obtain further information and possible implications before making a decision.

Information you need to provide

Once you have returned your members end of year data via i-Connect or your Annual Return, any member whose pension benefits have increased beyond the limit or is close to exceeding the limit, will need a further assessment to the end of the financial year.

If any of your members are affected by the Annual Allowance limit, we will contact you to request further pay information to 5 April.

Using this additional information, we will write to any relevant members by 6 October, providing them with a Pension Savings (tax) Statement.

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