Pensions and the money purchase annual allowance

Pension freedoms introduced in 2015 have given people greater flexibility when it comes to accessing their pensions. However, if you do draw funds from your pension, the amount you and your employer can pay into your pension each year is restricted.

This restriction on annual contributions is known as the money purchase annual allowance (MPAA), and anyone exceeding the MPAA will have to pay an annual allowance charge equivalent to an income tax charge (up to 45% for additional rate tax payers). The current MPAA for those who have flexibly accessed their pensions is £10,000, but the government has proposed reducing this to £4,000.

Why has the government proposed this change?

The idea behind the lower MPAA is to limit the possibility of people taking advantage of tax relief by paying a large proportion of their salary into their pension, gaining tax relief on that amount, then withdrawing a lump sum tax free. While that makes sense on paper, this change represents a significant drop and could penalise those who take advantage of pension freedoms. Lots of people could be caught out by this reduction, and it could even discourage people from saving into their pensions.

Best-laid plans…

The MPAA reduction was due to be included in the Finance Bill 2017 and take effect in April 2017. However, due to the snap general election and the need to pass the bill through parliament quickly, many clauses were excluded – including the MPAA change. This means the MPAA still sits at £10,000. However, the government has signalled it intends to re-introduce the reduction later, and potentially apply it retrospectively from April 2017. It’s likely this will be examined in the next budget, whenever that may fall.

What this may mean for you

If the MPAA does indeed drop to £4,000, it will be very easy for individuals to fall foul of the new limit without realising, especially when you take employer contributions into account. If you’re already accessing funds from your pension while still making contributions, we recommend you take the following actions:

1. Check the contributions you’re making into your pension(s). Don’t forget to include your employer’s contributions.
2. If you are exceeding the limit, seek advice from an independent financial adviser.

MPAA is a complex issue that potentially affects many people, so it’s wise to seek professional advice. Discuss your individual circumstances with the Ascot Lloyd team today.