Introduction

Pensions are the most tax efficient way to save for retirement. Tax relief on contributions combined with virtually tax free investment growth and the ability to access a quarter of the fund tax free make them the ideal for this purpose. But the amount that can be contributed tax efficiently may be limited by the annual allowance. In order to maximise pension savings, it’s essential that advisers fully understand how the annual allowance rules operate.

This module should take around 90 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 90 minutes can be claimed.

Outcomes

On completion of this module you should be able to:

  1. Describe how pension funding is measured against the annual allowance
  2. Determine when unused annual allowance can be carried forward
  3. Explain when the annual allowance may be restricted
  4. Calculate any annual allowance tax charge
Literature

Learning material

This module explains how the annual allowance can limit what can be saved into pensions tax efficiently, what counts towards the allowance, when unused allowance may be carried forward and how the charge for exceeding the allowance is calculated.

CPD minutes: 90

Read the Annual allowance guide

Post learning assessment

Question 1

Which of the following DO NOT count as an input amount for Defined Contribution (DC) pension schemes?

  1. Personal contributions
  2. Employer contributions
  3. Personal contributions made after age 75
  4. Contributions made by a third party

Question 2

Which of the following statements about carry forward is FALSE?

  1. It's only possible to use carry forward after the current year's annual allowance has been fully used up
  2. Unused allowance can be brought forward to the current tax year from the previous three tax years - starting with the earliest year first
  3. The person had to have been a member of a registered pension scheme at some point during the carry forward year in question
  4. Those who have triggered the money purchase annual allowance can only carry forward £4,000 for each tax year into money purchase (DC) schemes

Question 3

Megan earns £230,000 and has no other income. She receives employer pension contributions of £20,000 for the tax year. She makes a personal contribution to her pension of £30,000 by carrying forward unused allowance from earlier years. What is Megan’s annual allowance?

  1. £40,000
  2. £35,000
  3. £20,000
  4. £10,000

Question 4

How are contributions which exceed the annual allowance taxed?

  1. An unauthorised payments charge of 40% is applied
  2. An unauthorised payments charge of 40% plus an unauthorised payment surcharge of 15%
  3. The excess contributions are added to the individual’s earnings to determine the rate(s) of tax that will apply
  4. The excess contributions are automatically refunded with no tax charge applied

Check your answers

Claim your certificate







Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.