There are many pitfalls in the tax system that can entrap the unwary and one such relating to pensions has just opened up when we all thought it might have gone away.
The Government has announced that it is to go ahead with its controversial plans to cut the money purchase annual allowance (MPAA) which was first announced in the Autumn Statement of 2016 and then shelved after the June General Election was called. To make matters worse, the measure is to be introduced retrospectively, commencing from April 2017.
This change needs to be implemented through a new Finance Bill which gives us the interesting situation of Parliament debating this autumn what tax allowances will be effective from last April.
The MPAA refers to the amount that savers can put back into money purchase pensions tax-efficiently once they have withdrawn money from a money purchase pension ‘flexibly’.
The MPAA is to be reduced from £10,000 to £4,000 per annum and this will affect those who have accessed their pensions flexibly (from age 55 onwards) and want to continue working while making further pension contributions.
The Government argues that the measures will curb pension savings being ‘recycled’ to take advantage of tax relief – in other words enjoying pension tax relief twice.
Many in the industry deny this is a common practice and see the new measure as just another way of raising revenue for the Treasury while at the same time making the new pension freedoms less flexible than hitherto.
Whatever the rights and wrongs, we now have some clarity regarding MPAA which helps us plan more effectively.
The big concern, however, is that the considerable amount of people who are taking advantage of the new flexible arrangements while continuing to contribute to a defined contribution pension scheme, may be completely unaware of MPAA and could be caught out by the change and face an unexpected tax bill having paid in over the allowance.
The most common situations where MPAA is triggered include:
- Taking your entire pension pot as a lump sum or starting to take ad-hoc lump sums
- Putting your pension pot money into a flexi-access drawdown scheme and starting to take an income
- Buying a flexible annuity where the terms of the annuity contract allow actual, or possible, decreases in the amount of annuity payable other than in prescribed circumstances
- Having a pre-April 2015 capped drawdown plan and starting to take payments that exceed the cap
MPAA is a real booby trap for the unwary but there are always tax-efficient alternatives to cope with the impact of change. Nevertheless, the pension landscape is complex and professional advice is essential.
Anyone who may be affected by changes in MPAA rules and wants to learn more please contact us.
The Financial Conduct Authority does not regulate Tax planning.