Anyone investing in a pension scheme, including defined benefit and career average scheme, needs to know their total pension savings to work out the threshold and adjusted income.

For defined contribution schemes (also known as money purchase schemes), pension savings are usually the amount of savings made by the individual, and an employer, for example, during the pension input period (the period over which the pension contribution is measured).

Details of pension savings need to be obtained directly from individual scheme administrators, although they do send out annual reviews providing regular updates as well.

To calculate the pension savings made by an employer, start with the total pension savings made during the pension input period and deduct the savings of the individual pension holder (or any payments by someone else on your behalf) made during this period (excluding the employer).

To find out the amount the pension has increased for defined benefit schemes (like career average schemes), deduct the opening value from the closing value for the pension input period.

From the 2016 to 2017 tax year, the pension input period is 6 April to 5 April (the same as the tax year).

Checking pension annual allowance

It is important to work out the net, threshold and adjusted income before checking the pension annual allowance to see if you have:

• to pay an annual allowance tax charge because your pension savings go above the annual allowance for that year, including unused annual allowances from the previous three tax years; and
• any unused annual allowances from the previous 3 tax years to carry forward.

If the adjusted income is over £150,000 the annual allowance in the same tax year will be reduced.

It will not be reduced if the threshold income for that year is £110,000 or less, regardless of the level of adjusted income.

For every £2 the adjusted income goes over £150,000, the annual allowance for that year reduces by £1. The minimum reduced annual allowance is £10,000.

The lifetime allowance is currently £1m; tax is paid if pension pots are worth more than this limit. All pension pots contribute to the total figure.

The rate of tax paid on pension savings above the lifetime allowance depends on how the money is paid out - the rate is:

• 55% if paid as a lump sum; or
• 25% if paid in any other way, for example pension payments or cash withdrawals.

Pension schemes: work out your reduced (tapered) annual allowance issued 6 March 2018

Lifetime allowance: tax on your private pensions contributions

Essential reading

Read our exclusive pensions and tax liability series by Kay Ingram, director of individual savings and investments at national IFA LEBC here