Is there a limit to how much you can pay into a pension?

Pensions are a great saving tool for retirement, and we are often told to save as much as we can into our pension. So, is there a limit to how much we can contribute?

There isn’t a limit as such to how much you can contribute to your pension, you can save as much as you like. However, there are a few limits to be aware of in relation to tax. These are:

  • Pension annual allowance

  • Money purchase annual allowance

  • Pension lifetime allowance

Being aware of these allowances will help you make the most of tax relief and avoid any charges.

What is pension annual allowance?

Pension annual allowance is a limit on how much you can pay into your pension each year to receive tax relief. Tax relief is a bonus from the government that you receive when you make contributions to your pension. The government pays you back the income tax that you would have already paid on the money you contribute so that it’s effectively paid tax-free.

The pension annual allowance places a limit on the amount you can pay into your pension each year to receive tax relief. The maximum amount is 100% of your wages or £40,000, whichever is lower. Any contributions you or your employer make as well as the tax relief you receive contributes to this allowance. If you make any contributions over that amount, you will not receive tax relief on that money.

What is Money Purchase Annual Allowance?

Money Purchase Annual Allowance is linked to your pension annual allowance. When you start accessing your pension, the first 25% is tax-free. Once you start withdrawing the remaining 75%, your pension is moved into what is called a crystalised fund. At this point, your annual allowance for receiving tax relief on contributions drops down to £4,000. And this is known as Money Purchase Annual Allowance.

What is pension Lifetime Allowance?

Lifetime Allowance is a limit on how much you can build up in your pension before facing tax charges. The limit is currently £1,073,100 and will remain the same until 2026. The contributions you and your employer make, the returns on your investments and any tax relief you receive will go towards this allowance.

How can a financial adviser help?

Both pensions and tax can be complicated by themselves, let alone when you combine the two. A financial adviser can help you understand your pension and how to avoid tax charges. They can also help you manage your pension in the right way to make the most of the tax relief you receive on your contributions.

Thinking about your pension options?

Regulated and authorised by the FCA, we can help you to make the best possible decisions when it comes to your pensions.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.