Will Recent Changes to the “Money Purchase Annual Allowance” Affect You?
What is the MPAA? How does it differ from the Annual Allowance?
The MPAA was introduced in April 2015 and relates to money purchase pension contributions. It applies to anyone who accesses their pension benefits on a flexible basis – or in other words, makes a draw down and takes income from their pension pot. This affects the type of pension schemes that you can generally draw from age 55, not the old style final salary schemes which are now becoming rare. The MPAA is effectively the tax allowable amount you are permitted to pay in to your pension in each tax year.
The Annual Allowance (AA) is the maximum that anyone can pay into a money purchase pension scheme in each tax year and obtain tax relief on and is currently set at £40,000. Think of this is the upper ceiling limit.
In the Chancellor’s 2016 Autumn Statement, it was announced that the Money Purchase Annual Allowance (MPAA) limit is being reduced from £10,000 to £4,000 on 6th April 2017. But this limit only kicks in when you take actual income from your pension pot not when you take your entitlement to tax free cash.
Why is the limit being reduced?
The reduction in the limit from £10,000 to £4,000 has come into force in order “to prevent inappropriate double tax relief” according to Philip Hammond. But this is causing concern in some quarters that people who take a phased approach to retirement will not be able to save enough into their pensions in the future.
What does this mean for me?
Well, the good news is that it may not affect you at all.
If you are over 55 and have taken nothing or only ever drawn the tax free amount from your pension pot (i.e. no more than 25% of your fund) then you will not be affected by the reduction in the MPAA limit. You will still be able to obtain tax relief on the full £40,000 Annual Allowance of additional pension contributions.
However, if you have taken any more than the tax free amount (even just £1 as income) then in most cases your annual pension allowance will be restricted down by the MPAA for the rest of your life – something that’s extremely important for you to be aware of.
These days, money purchase pension arrangements allow you great flexibility and if you are a higher rate taxpayer making lump sum additional pension contributions is a great way to go. Remember, subject to the limits discussed, if you pay tax at 40% then for every 60p you pay in to your pension the government will add 40p by way of a reduction in your tax. If you are over 55 you can then draw 25p of that £1 back out immediately.
If you can only pay £4k in however as opposed to £10k or even £40k then the advantage of using this option becomes very limited.
If you have previously drawn income and are caught by the MPAA, then you have until 6th April to pay in an additional sum to utilise your current £10,000 of allowable relief. In the next tax year this limit will be reduced down to £4000 only.
Where else can I get information about MPAA?
If you’re concerned about your financial situation in the run up to retirement, our legal and wealth management services team at THP can help.Call 0800 6520 025 to speak to a member of the THP team today – we look forward to hearing from you!