FDA GUIDE TO

PENSION
TAX RELIEF
ANNUAL AND LIFETIME ALLOWANCE

SEPTEMBER 2021
This briefing provides an update to our guide to pension tax relief issued in 2015 for
members of the Principal Civil Service Pension Scheme (the PCSPS), and our February 2016
and May 2019 updates - all are still available on the FDA website.

In this briefing, we update the heat charts from our 2019 guide to allow for the tapering of
Annual Allowance. We also provide more details on what you can do if you think you may be
affected by any of the pension tax relief limits described in this briefing.

If members would like Through FDA Portfolio Lighthouse offers FDA

further advice in this area members can access the members a free initial
they should contact an services of Lighthouse consultation, but should
Independent Financial Financial Advisers. Find this lead to more detailed
Adviser (IFA) who is legally out more at advice FDA members will
able to advise on these www.fda.org.uk/ benefit from a special
matters. FDAPortfolio reduced rate.

McCloud remedy – Age Discrimination

In 2015, new laws introduced the alpha scheme. These laws included protections which meant
that some members of the legacy classic and premium schemes didn’t join alpha straight
away or at all, depending on their age. Following a legal challenge, the courts determined that
protections given to some members were age discriminatory.

In February 2021, a response to the consultation on the government’s proposed remedy to

the age discrimination was published. The government confirmed that the legacy schemes
will close on 31 March 2022. From 1 April 2022, all members in service will build-up benefits
as members of the alpha scheme. Benefits built up in the legacy schemes will be protected,
including final salary positions.

The finer details of the tax treatment of the McCloud remedy are not yet fully known and are
not covered in this briefing.

Further details on the McCloud remedy can be found on the FDA website.

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Pension tax relief: a recap
The Government gives tax relief on contributions to pension schemes and allows up to 25%
of the benefits to be taken tax-free at retirement. Since 2006, there have been limits on the
amount that can be contributed each year, and the total benefits an individual may build up
over their career. Beyond these limits, tax charges apply.
Broadly, these limits are as follows:
Annual Allowance (“AA”)
This is the maximum amount of pension benefit which can be earned each year and benefit
from full tax relief.
For the 2021/22 tax year, the limit for those earning broadly less than £240,000 a year is
£40,000. The tapered Annual Allowance for higher earners is as follows:

ADJUSTED INCOME ANNUAL ALLOWANCE

£240,000 or below £40,000

£250,000 £35,000
£260,000 £30,000
£270,000 £25,000
£280,000 £20,000
£290,000 £15,000
£300,000 £10,000
More than £312,000 £4,000

More information on tapered Annual Allowance is provided below.

Lifetime Allowance (“LTA”)
This is the maximum amount of pension benefits which can be earned over a career and
benefit from full tax relief.
For the 2021/22 tax year, the LTA is £1,073,100. Between 2018 and 2020, the LTA increased
each April in line with the Consumer Prices Index (CPI). However, in the 2021 Budget, the
government confirmed that the LTA will be frozen at the current level until April 2026.

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Annual Allowance (“AA”)
What is the limit?
For the 2021/22 tax year, the limit for those earning broadly less than £240,000 a year is £40,000.
For those with an annual income over £240,000 (including the value of pension savings),
a lower tapered AA limit may apply. However, the way ‘income’ is calculated means
that anyone earning an annual income under £240,000 can also be affected. There are
two important new definitions outlined below, however these income definitions can be
complicated and more information is provided at the following link: www.gov.uk/guidance/
pension-schemes-work-out-your-tapered-annual-allowance
DEFINITION LIMIT

Threshold income Broadly your taxable income (including rental £200,000

income, for example) less your pension contributions.
For example, a member of Classic with a taxable
income of £210,000, would have a threshold
income of £193,095 after deduction of 8.05%
pension contribution, and therefore tapered AA
would not apply.
Adjusted income Broadly threshold income plus pension savings £240,000
(i.e. your taxable income plus the value of your
employer’s contributions to your pension)
The sting in the tail is that adjusted income is not just what you are paid, it also includes the
‘value’ of the pension benefits you built up during the year. This means there is the potential for
the reduction in Annual Allowance to apply to people earning much less than £240,000 a year,
if the value of the pension benefits they earned is large.
The taper reduces the AA limit by £1 for every £2 of adjusted income received over
£240,000, until a minimum AA limit of £4,000 is reached. This means that the AA for higher
earners with threshold income higher than £200,000 is as follows:
ADJUSTED INCOME ANNUAL ALLOWANCE

£240,000 £40,000
£250,000 £35,000
£260,000 £30,000
£270,000 £25,000
£280,000 £20,000
£290,000 £15,000
£300,000 £10,000
More than £312,000 £4,000
It is also important not to forget the Money Purchase Annual Allowance (MPAA). If you
flexibly access any defined contribution pension from another scheme, then you will trigger
the MPAA, which reduces the maximum pension benefit which can be earned each year (and
benefit from full tax relief) to £4,000.
More information can be found at www.moneyadviceservice.org.uk/en/articles/
money-purchase-annual-allowance

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How is it calculated?
It is important to note that the Annual Allowance applies across all of the schemes you belong
to, it is not a ‘per scheme’ limit and includes all of the contributions that you or your employer
pay or anyone else who pays on your behalf. This includes Defined Contribution (DC) schemes
and Defined Benefit (DB) schemes.
For DB pension schemes such as Classic, Classic Plus, Premium, Nuvos and Alpha, HMRC
uses conversion factors to calculate the ‘value’ of the benefits earned and tests this value
against the above limits. These conversion factors are as follows:
Each £1pa pension earned in a year is assumed to be worth £16. Any additional cash sums
earned on top are valued on a £1-for-£1 basis.
The pension earned over the year is calculated as the total pension earned at the END of the
period (called the “Pension Input Period” or “PIP”) minus the total pension at the START of the
PIP adjusted for inflation. Since 2016, PIPs run in line with the tax year. Therefore, each PIP will
start on 6 April and end on 5 April in the following year.
If you (and/or your employer) have paid any contributions to a DC scheme (such as an AVC
scheme or into partnership), these are also added.

Example: Member continuing to build up benefits in classic receives a promotion and a pay-rise
from £72,000 to £88,000 after 16 years of service with CPI at 1.02%.

Step 1: Calculate the value at the START of the PIP and “inflation proof”:
Pension = (£72,000 x 15/80) = £13,500 pa
Lump sum = (3 x 72,000 x 15/80) = £40,500
“Inflation proof” pension = £13,500 x 1.02 = £13,770 pa
“Inflation proof” lump sum = £40,500 x 1.02 = £41,310
Step 2: Calculate the value at the END of the PIP:
Pension = £88,000 x 16/80 = £17,600 pa
Lump sum = 3 x £88,000 x 16/80 = £52,800
Step 3: Calculate the increase in value over the PIP:
Pension = (£17,600 - £13,770) x 16 = £61,280
Lump sum = (£52,800 - £41,310) = £11,490
Total change =£61,280 + £11,490= £72,770
Step 4: Calculate employer share of this total increase in value:
Member contributions in the year = 7.35% x £72,000 = £5,292
Employer share of increase in value of pension = £72,770 - £5,292 = £67,478
Step 5: Calculate threshold income, adjusted income, and Annual Allowance:
Threshold Income = £72,000 - £5,292 = £66,708. This is less than £200,000 so tapered
Annual Allowance does not apply.
Adjusted Income = £72,000 + 67,478 = £139,478.
Annual Allowance: £40,000
Step 6: Test against the Annual Allowance:
Annual Allowance exceeded by: £72,770 - £40,000 = £32,770
Step 7: Calculate any tax charge payable:
Unless the member has any unused allowances from the previous 3 years, he or she will incur a tax charge of:
£32,770 x 40% = £13,108

Note: This assumes the member’s marginal tax rate is 40%. The marginal rate of tax is the rate paid
on the next pound earned. More information on marginal tax rates can be found here:
www.gov.uk/income-tax-rates

More examples were provided in our 2015 guide.

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Am I likely to be affected?
An increase in pension of more than £2,500 pa over a year is guaranteed to breach the AA limit.
This means an Alpha member would be affected if they earned over £108,000. However, it is
not just the very high earners who will be affected. You could also be affected if:
l You have long service;

l You have recently been promoted or received a large pay rise;

l You are paying AVCs, EPAs, or buying added pension;

l You have transferred-in service from another scheme, or have linked a previous period of
employment from the Civil Service; or
l You are retiring on ill-heath with an enhancement to service.

Heat charts at the end of this briefing will help you check if you are likely to be affected.

What can I do if I think I might be affected?

Check it…
A Pension Savings Statement will be sent to you by MyCSP if you meet one or more of the
following criteria:
l You breached your AA limit in the previous tax year;

l You earn over £100,000; or

l You request a Pension Savings Statement.

If you have benefits in Alpha and one of the other sections of the PCSPS, you will receive two
statements.
Even if you have breached the AA limit, you may be able to use unused allowances from the
previous 3 years to keep you within the limit. If you haven’t received these, you should ask for
a copy of your Pension Savings Statements for the previous 3 years.
HMRC’s calculator will show you if this could help:
www.tax.service.gov.uk/pension-annual-allowance-calculator

Declare it…
If you breach the AA limit, it is your responsibility to tell HMRC via your Self Assessment,
regardless of how you intend to pay it (see below).
If you are registering for Self Assessment for the first time, you can find further guidance here:
www.gov.uk/register-for-self-assessment/not-self-employed

Pay it…
If you have a tax charge, you can pay it directly to HMRC. Alternatively, you can ask your
pension scheme to pay the charge on your behalf in exchange for a reduction in your benefits -
a facility called Scheme Pays..

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There are two types of Scheme Pays: Mandatory and Voluntary.
You can use Mandatory ‘Scheme Pays’ if all three of the following apply to you:
l your tax charge is over £2,000; and

l your tax charge has resulted from an increase in benefits from a single civil service pension
scheme; and
l your Scheme Pays deduction is applied to the benefits within that scheme.

If you don’t meet the above criteria, but you still wish to pay your tax charge by Scheme Pays,
you can do this using Voluntary ‘Scheme Pays’.
If you want to use Mandatory or Voluntary Scheme Pays, you need to notify HMRC via your
Self Assessment. The timetable for applying and paying your tax charge arising from the
2020/21 tax year via Scheme Pays is as follows:.

ACTION DEADLINE

If you have breached the AA, you will receive By 6 October 2021 (but most expected by
a Pension Savings Statement(s) 31 August 2021)

Request a Scheme Pays quote (see link for the By 19 November 2021
form below)

Scheme Pays quote sent to you By 10 December 2021

Return the Scheme Pays form By 24 December 2021

Notify HMRC of a tax charge and your By 31 January 2022

intention to pay it via Scheme Pays

The pension scheme pays the tax charge by By 31 January 2022

Voluntary Scheme Pays

The pension scheme pays the tax charge by By 14 February 2023

Mandatory Scheme Pays

To request a Scheme Pays quote use this form.

https://www.civilservicepensionscheme.org.uk/media/682164/scheme-pays-
quote-request-june-2021.pdf

Please note the deadline for members to notify HMRC if they intend to use Scheme Pays in
respect of the 2019/20 tax year has now passed.

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Reduce it…?
If you are an existing member of classic, classic plus, nuvos, premium or alpha, you can
switch from your current scheme to partnership. Joining partnership will mean that you
are still eligible for a death-in-service lump sum benefit of 3 x your pensionable salary, but the
likelihood of breaching the AA limit each year is significantly reduced.
Previously, if you wished to switch from one of the other civil service pension schemes to
Partnership, or vice-versa, you were only able to switch every six months and had to give 3
months’ notice. From April 2018, the number of switching dates has increased and the notice
period reduced to 2 months. It is important to note, however, that after switching, you will not
be able to switch again for another 12 calendar months.
Finally, if you think you will repeatedly breach the AA limit, you may be considering opting out
of the civil service pension scheme you are in. Before doing so, we strongly recommend
that you seek independent financial advice, and you should be aware of the
valuable life cover that you would be giving up if you do.

Lifetime Allowance (“LTA”)

How is it calculated?
Each £1pa pension is assumed to be worth £20. Any additional cash sums earned on top are
valued on a £1-for-£1 basis. If you (and/or your employer) have paid any contributions to
a defined contribution scheme (such as an AVC scheme or into partnership), the amount
accumulated at retirement is also added.

Example: Member retires on 30 April 2021 after 40 years’ service in classic scheme

Step 1: Calculate the benefit at retirement

Pension = £88,000 x 40/80* = £44,000 pa
Lump sum = 3 x £88,000 x 40/80 = £132,000

Step 2: Calculate the HMRC value of the benefit at retirement

Pension = £44,000 x 20 = £880,000
Lump sum = £132,000
Total Value = £1,012,000

Step 3: Test against the Lifetime Allowance limit:

The LTA limit on 30 April 2021 was £1,073,100, so the member does not exceed this limit.

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Am I likely to be affected?
The LTA limit for the 2021/22 tax year was £1,073,100. Between 2018 and 2020, the LTA
increased each April in line with the Consumer Prices Index (CPI). However, in the 2021 Budget,
the government confirmed that the LTA will be frozen at the current level until April 2026.
Members whose benefits exceed the amounts below, may therefore incur a LTA charge:

2021/22 TAX YEAR

Lifetime Allowance £1,073,100

Premium, Nuvos, Alpha £53,655 pa
Classic £46,656 pa plus automatic lump sum
Classic Plus Between £46,656 pa plus automatic lump sum,
and £53,655 pa

There are examples and heat charts at the end of this briefing to help you check if you are likely
to be affected.

What should I do if I think I might be affected?

Check it…
To enable you to consider your position regarding your LTA and to seek further advice, all
members whose Civil Service Pension benefits (excluding any contributions made to the Civil
Service Additional Voluntary Contributions scheme) exceeded 90% of the LTA as at 31 March
2020 should have been written to by Civil Service Pensions by 31 March 2021.
Civil Service and non-departmental public body (NDPB) employers were previously obliged
to make one-to-one pension tax sessions available for any employee who received an LTA
letter. Following the pandemic, employers now have the discretion to fund and arrange
these sessions for groups of employees affected. Therefore you should ask your employer to
provide these tax advice sessions free of charge. If declined, you can still access the services of
Lighthouse, the FDA’s partner Independent Financial Adviser referred to earlier, as part of one
of the benefits of FDA membership.

Declare it…
Even though your scheme will collect and pay the tax, if you breach the LTA, it is your
responsibility to tell HMRC. You do this via Self Assessment.

Reduce it…
These are some considerations for potentially removing or reducing your LTA charge as follows.
If you retire early with actuarially reduced benefits, the value of your benefits is calculated
based on your reduced benefits. This could reduce your LTA charge.
If the value of your pension savings at 5 April 2016 were higher than £1 million, you may be
able to protect your LTA limit up to a maximum of £1.25 million using Individual Protection
2016 or Fixed Protection 2016. More details on these protections, including how to apply,
can be found at www.gov.uk/guidance/pension-schemes-protect-your-lifetime-
allowance

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If your health is in decline and you are considering an Ill Health Retirement application, there
may be significant tax implications if successful where the Scheme Medical Adviser does not
exempt your tax liability due to critical illness criteria.
If you are getting close to your LTA limit, you could consider opting out of the civil service
pension scheme you are in, by potentially joining partnership where you can easily track the
value of your benefits in this scheme.
We strongly recommend that you seek independent financial advice before
considering any of the above actions.

Disclaimer
This guide is intended to provide information about procedures, criteria and practices in relation to civil service pension schemes and by analogy
schemes. There are several schemes with different rules that may be subject to change. As a result, you should not rely solely on the content of
this guide when making decisions relating to Your pension. The FDA strongly recommends that you should seek financial advice before making
any significant decision in relation to your pension. The FDA is not legally authorised to provide such financial advice and nothing in this guide
is intended to amount to financial advice.

Whilst every care has been taken in preparing the information published in this guide, the FDA does not guarantee the precision or currency
of the content. The FDA cannot be held responsible for any errors or omissions and accepts no liability whatsoever for any loss or damage
howsoever arising.

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Heat charts: Annual Allowance
If you have only ever been a member of Nuvos or Alpha, you are only likely to breach the
Annual Allowance (“AA”) limit if you earn over £108,000 (or have bought Added pension, an
EPA or buy-out the actuarial reduction on redundancy).
The situation is more complicated for anyone who has service in Classic, Classic Plus, or
Premium. Generally speaking, the more service you have and the larger your salary, the more
likely you are to exceed the AA.
The heat charts below will give you an indication as to whether or not you might breach the AA
limit by giving an illustration of the PIP increase, depending on what scheme you were in and
what scheme you move to, using the following key:

RED You will breach the AA limit with a pay-rise of 0% above CPI.
AMBER You will breach the AA limit with a pay-rise of between 0% and 5% above CPI
GREEN A pay-rise of over 5% above CPI would be needed to breach the AA limit

Assumptions:
The figures in the heat charts show the increase in value of the pension (and lump sum where
appropriate) over the year, assuming a pay rise in line with CPI.
Threshold income has been calculated using salary (less pension contributions), and ignores
any other taxable income you may have, such as rental income.

Classic

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Classic plus

Premium

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Nuvos Alpha

* For both Nuvos and

Alpha, the Annual
Allowance limit will
be breached if you
earn over around
£108,000, regardless
of the number of years
you have been in the
scheme.

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Heat charts: Lifetime Allowance
The heat charts below will give you an indication as to whether or not you might breach the
Lifetime Allowance (“LTA”) limit, depending on what scheme you are in, using the following key:

RED You will breach the LTA limit of £1,073,100 in the next year
AMBER You are likely to breach the LTA limit in the next 5 years
GREEN You are unlikely to breach the LTA limit in the next 5 years

The figures shown in the heat charts indicate the value of the pension (and lump sum where
appropriate) at the point of retirement, assuming nil annual pay rises.

Classic

Service 20 25 30 35 40
Salary
30,000 172,500 215,625 258,750 301,875 345,000
40,000 230,000 287,500 345,000 402,500 460,000
50,000 287,500 359,375 431,250 503,125 575,000
60,000 345,000 431,250 517,500 603,750 690,000
70,000 402,500 503,125 603,750 704,375 805,000
80,000 460,000 575,000 690,000 805,000 920,000
90,000 517,500 646,875 776,250 905,625 1,035,000
100,000 575,000 718,750 862,500 1,006,250 1,150,000
110,000 632,500 790,625 948,750 1,106,875 1,265,000
120,000 690,000 862,500 1,035,000 1,207,500 1,380,000
130,000 747,500 934,375 1,121,250 1,308,125 1,495,000
140,000 805,000 1,006,250 1,207,500 1,408,750 1,610,000
150,000 862,500 1,078,125 1,293,750 1,509,375 1,725,000
160,000 920,000 1,150,000 1,380,000 1,610,000 1,840,000
170,000 977,500 1,221,875 1,466,250 1,710,625 1,955,000
180,000 1,035,000 1,293,750 1,552,500 1,811,250 2,070,000
190,000 1,092,500 1,365,625 1,638,750 1,911,875 2,185,000
200,000 1,150,000 1,437,500 1,725,000 2,012,500 2,300,000
210,000 1,207,500 1,509,375 1,811,250 2,113,125 2,415,000

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Classic plus

Premium

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