The annual allowance is a limit to the total amount of money you can save into your pension arrangements across all of the different schemes you belong to and receive tax relief on.
The amount you save into your pension pot can benefit from tax relief, as long as that amount doesn’t exceed the annual allowance in any tax year. If your taxable earnings in the year are below the annual allowance, then you can receive tax relief on 100% of your earnings (up to the annual allowance), or £3,600 gross, whichever is higher.
The annual allowance limit for the current tax year is £40,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. Contributions over this limit will result in a tax charge, known as the annual allowance charge.
When you’ve flexibly accessed your pension pot (note this doesn’t apply if you only take your tax-free cash from flexi-access drawdown), you’ll be subject to a money purchase annual allowance of £4,000 (2022/23 tax year).
As you’ve chosen to take a flexible lump sum, your annual allowance for any future savings into defined contribution pension schemes is reduced to £4,000 in the current and any future tax year. This is known as the ‘money purchase annual allowance’.
You’ll be liable for a tax charge if your future pension savings exceed this reduced money purchase annual allowance.