Most people would agree that investing into pensions is by far and wide the most attractive way to save for your retirement income due to the very favourable tax treatment pensions benefit from. The exchequer wishes to reduce the cost of these tax benefits and the amount you are able to save in pensions has reduced from £255,000 in 2010/11 to £50,000 in 2011/12. The current maximum is now just £40,000. This is known as the Standard Annual Allowance. Those who have earnings and benefits over £150,000 will have this allowance reduced (tapered) but this is the subject of a separate blog. Where the maximum allowances have not been used in past years it is possible to carry forward unused allowances from 3 previous years once the current year’s allowance has been fully utilised.
In April 2015 tax rules were changed to give people greater access to their money purchase pensions. This is known as pension’s freedom. Over concerns that these new freedoms might be abused a reduced pension’s contributions allowance of £10,000 was introduced for those who accessed their money purchase pensions flexibly. This is called the Money Purchase Annual Allowance or MPAA. This has since been further reduced to £4,000 a year and it does not allow for carry forward of any unused reliefs.
The MPAA is set in motion when certain events, including but not exclusively the below, happen:
- You take a portion (or all) of your money purchase pension benefits, including tax free cash, as a lump sum, known as Uncrystallised Fund Pension Lump Sum (UFPLS).
- You take taxable income or a taxable lump sum using a flexi access drawdown plan. This can include taking income from a short term annuity. If you are only taking your 25% tax free cash entitlement with the rest of your pension remaining in a flexi access drawdown plan you will not trigger the MPAA.
- You take more income than your income cap from your pre 6th April 2015 capped drawdown plan.
- You convert your capped drawdown plan to a flexi access drawdown plan and then take income or a lump sum from the fund.
- You take a lump sum, when entitled to primary protection, where the lump sum protection exceeds £375,000.
- You receive a pension, paid directly from the funds of a money purchase arrangement, where the arrangement is providing scheme pension paid directly from the funds of a money purchase scheme to less than 11 other members (including dependents benefits) at the time the first payment is made.
The MPAA does not apply where your pension income comes from an annuity, a defined benefit scheme such as a company final salary pension, or certain other arrangements.
Once the MPAA has been triggered there are notification requirements which carry financial penalties if not completed promptly.
With so many, often complex, circumstances where the MPAA can be triggered, it is wise to carefully consider whether or not to access your money purchase pensions flexibly. This is especially the case if you are contributing more than £4,000 a year, including employer’s contributions, to a money purchase pension scheme such as a personal pension, or you are likely to do so in the future. Once the MPAA has been triggered there is no going back so you need think carefully before making the decision to access flexible benefits.
It is possible that you have other sources of income or capital that may be available to you to meet your financial needs that have not been considered. Just because you can access your pensions flexibly does not mean it is the best way forward for you and getting it wrong may be very costly.
Always seek individual bespoke financial advice from a qualified financial planner before deciding on the best source to meet your capital and income needs.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
Kristina Bailey Dip FA CeMAP