Individuals can pay as much as they like to any number of registered pension schemes and claim tax relief on contributions up to 100% of their relevant UK earnings each tax year, or £3,600 per year if their relevant UK earnings are less than this amount. However the amounts contributed to a pension each year are subject to an “annual allowance”. The annual allowance for 2009/10 is £245,000. Contributions in excess of the annual allowance are subject to a 40% tax charge.

In addition, there is a 'lifetime allowance' against which the total value of the benefits built up in the pension fund/s (including investment growth) is tested. For 2008/09, the lifetime allowance is £1,650,000. The value of any pensions savings above the lifetime allowance is subject to a 'lifetime allowance charge' as follows:

if benefits above the lifetime allowance are taken as a pension, the lifetime allowance charge on the excess amount is 25%

if benefits above the lifetime allowance are taken as a lump sum, the lifetime allowance charge on the excess amount is 55%

The lifetime allowance 'test' takes place when an individual reaches age 75 or start drawing pension benefits.

75

50

245,000

40%

1,750,000

25%

55%

25%