Understanding the Lifetime and Annual Allowances

Members receive tax relief on their pension contributions to encourage saving for retirement. This is via either net pay for contributions to workplace pensions from payroll or relief at source for contributions to personal pensions.

This is because of a principle that has existed since the 1921 Finance Act that pension contributions and investments are exempt from tax but the resulting pension in payment is tax deductible.

The Annual Allowance and Lifetime Allowance were introduced on 6 April 2006 to limit the cost of pensions tax relief to the Treasury.

Although this system was introduced as a part of a project to simplify pensions, alterations by successive governments have made the system far more complicated!

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