Contributions
You can make very large contribution to pensions of up to 100
per cent of your earned income, subject to a limit of £225,000 in
the tax year 2007-08. This limit will increase each year as
follows:
2008-09 £235,000
2009-10 £245,000
2010-11 £255,000
If your total contributions, including those made by an employer
on your behalf exceed the annual limit, you (the employee) will
face a benefit-in-kind income tax charge of 40 per cent on the
entire excess over the contribution limit.
Life time allowance (LTA)
This is the value of your total pension savings which you can
draw on in your lifetime without a tax penalty.
The allowance in 2007-08 is £1.6 million, but this will increase
each year as follows:
2008-09: £1.65 million
2009-10: £1.75 million
2010-11: £1.8 million
When calculating your LTA, any final salary (also known as
‘defined benefit’) pensions you own will be treated as being worth
£20 for each £1 of pension provided.
So a £25,000 final salary pension will be valued at £500,000.
Any money purchase (defined contribution) pensions you have will be
valued according to their prevailing fund value when you come to
take your pension.
If the sum of all your pension funds exceeds the LTA and you
draw on the excess over the LTA limit in retirement, there is a tax
charge of 25 per cent, if pension is taken as income and 55 per
cent, if taken as a lump sum.