How much can I put into my pension?

April 6 2010 was the last time that the lifetime allowance increased but, as of earlier this month, we are now on the move back up. The lifetime allowance is now linked to CPI and, while we are quite a way off of the £1.8m from 2010, the new lifetime allowance of £1,030,000 is moving in the right direction.

But how much can you put in each year? Annoyingly, there isn't a clear-cut answer to this question, as the amount you can invest is completely dependent on your relevant earnings. We have, however, listed the most common scenarios below, that will hopefully help you.

1. What are relevant earnings?

This covers your salary, wages, bonus, overtime and commission. It does not include dividends. Therefore, if you are a director of a company and receive a smaller salary which is offset by dividends, the amount you can save into your pension may be less than you might expect.

Also, remember that the lifetime allowance and annual allowance is based on all pensions that you have. This includes any workplace pensions and personal pensions. Unlike the ISA, you can hold more than one pension a year. Be careful that you do not get stung by hefty charges by investing too much.

2. I earn below £40,000, what can I save?

You can invest the equivalent of your UK earnings into your pension, including tax relief. This means, if you earn £30,000 over one tax year you can invest £24,000, with £6,000 being added as tax relief. If a company is paying the contribution, £30,000 can be paid into your pension.

3. I do not have relevant earnings. Can I still save into a pension?

Yes! You can invest £3,600 (per annum) into a pension, which will cost you £2,880. The extra £720 will be added by the government as tax relief, on any personal contributions

4. I earn over £40,000, but less than £110,000, what can I save into a pension?

The 'standard' annual allowance of £40,000 is relevant to you. This means that the most you can invest is £40,000 (including tax relief) – making personal contributions cost £32,000.

5. I earn over £110,000, how much can I save into my pension?

This is where it gets little more complex. You may be affected by the tapered annual allowance [add link]. If you are not 100% sure what you can invest into a pension, please speak to an independent financial advisor as this is heavily affected by certain pay and work benefits.

6. I have triggered the MPAA, what does that mean?

The MPAA, or money purchase annual allowance, is a reduction in the annual allowance after you flexibly access income from your pension. The MPAA is £4,000.

You do not trigger the MPAA by taking tax-free cash from your pension.

7. Someone mentioned Carry Forward recently– what is this?

If you have not used your full allowance in the past three years, you could use Carry Forward. Carry Forward is when you use previous unused allowances to maximise your pension savings.

You must have been a member of a UK-registered pension scheme in each of the years from which you are carrying forward, even if you have not made contributions and you can only contribute as much as your earn (including tax relief).

Tax year Annual Allowance Total contributions What can be carried forward? 
2015/16 £40,000* £40,000 £0
2016/17 £40,000^ £10,000 £30,000
2017/18 £40,000^ £0 £40,000

Based on the above, you could carry forward £70,000, meaning that you could invest £110,000 in this tax year. This is providing you have relevant earnings of £110,000 this tax year.

*In 2015/16 the rules were slightly amended to align the pension contribution year to the tax year. During this year you were able to invest twice, giving you the option to invest up to £80,000. If this was not used at the time, you could not carry it forward.

^2016/17 saw the introduction of the tapered allowance. If you earn over £110,000 your annual allowance could be reduced to £10,000. This would mean the amount you could carry forward would also be reduced. Find out more about tapered allowances here.

Please be aware, the amount of tax relief you will receive depends on individual circumstances, and this may change over time.

Published on 25/04/2018