Clients have been asking us about the Money Purchase Annual Allowance (MPAA) which reduced from £10,000 to £4,000 from April 2017.
Essentially, the MPAA applies if you access your pension ‘flexibly’ and its aim is to stop individuals from accessing their money purchase pension and at the same time avoid paying income tax on their salary by diverting their salary into their pension scheme, enjoying tax relief on the contributions and then withdrawing 25% tax-free. The reduced MPAA also curbs the ability to enjoy tax relief a second time, in other words, where an individual withdraws pension funds and then reinvests the funds in their pension.
It’s widely reported that many individuals have used the pension freedoms to access their pension funds and have continued to pay into a pension and yet, are not aware of the MPAA or the consequences of exceeding the allowance. Where individuals do trigger the MPAA and have exceeded the £4,000 allowance, their options are to:
- Pay the tax charge through their self-assessment tax return; or
- If certain conditions are met, ask their pension provider to pay the charge through their pension, using Scheme Pays.
The MPAA will apply in different scenarios however the most common is where individuals elect flexi-access drawdown (FAD) and take an income. There are also scenarios in which the MPAA won’t apply, for instance, moving your pension to a FAD arrangement, taking tax-free cash but not taking an income.
In addition to the MPAA, and since April 2006, we have seen changes to the Lifetime Allowance and the Annual Allowance; the introduction of Lifetime Allowance protections and Tapered Annual Allowance rules; and changes to the minimum pension age. Quite simply, the UK pension tax regime is a minefield and we’re not surprised individuals are confused and completely unaware of what can and can’t be done.
At Wells Gibson, we have no idea what the Government might do next, nor what further changes will be introduced to the UK pension tax regime. However, change is certain, and we passionately believe that planning for the future is key and needs to be ongoing. This is why Wells Gibson puts your life at the centre of our conversations and designs a Wealth Plan which will give you the greatest chance of a successful investment outcome and fulfilled life from the money you have and will have.
When you do eventually retire, you can say goodbye to the tension and hello to your pension!