Often when we take money from a pension it is because we are no longer earning and need to start to move into a drawdown situation rather than accumulation. However, since pensions freedoms have been introduced investors will sometimes take funds from their pension before retirement. This could be perfectly acceptable from a financial planning point of view but, the implications of taking income from a Money Purchase scheme need to be considered.
Normally you are able to make contributions to a pension up to the annual allowance, which is currently £40,000 for the 2019/20 tax year as long as your net relevant earnings allow. Once you have taken income from a Money Purchase Scheme you trigger the Money Purchase Annual Allowance (MPAA). Aside from some lesser used facilities, this primarily happens when you access a Money Purchase scheme and only when you take the taxable income. The current MPAA is £4,000 and has been at the level since the 6th April 2017. Prior to this it was £10,000.
What this means is that you can access your pension early, but you will then be limited as to how much you can add to your pension thereafter. Typically, it’s the tax free cash (TFC) that is taken in the first instance and the MPAA would not come into play in this event, but would do so beyond the TFC.
If you are one of the fortunate and have an elusive final salary or defined benefit scheme, then you can start taking the benefits from this plan without triggering the MPAA at all.
So, when it comes to accessing your pension before you are planning to cease any contributions you need to consider all your options first.
There is the small pots rule that is very handy in this instance, as if the pension you would like to access is below £10,000 then you would not trigger the MPAA, even if you took the whole plan in one go. Better still you are able to use the small pot benefit three times in your lifetime. So, in this event you would retain the full Annual Allowance amount of £40,000. Therefore, those with more than one pension pot should consider carefully the order in which they are accessed.
It is well worth seeking financial advice in this instance to ensure your ability to save for your longer-term future is not affected.
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 about the content hereof and any such action or inaction. Professional advice is necessary for every case.
Kristina Bailey Dip FA CeMAP