From April 5 this year, the Treasury is considering reducing the Money Purchase Annual Allowance (MPAA). And it is no small reduction – the suggested cut is from £10,000 to £4,000.
What is the MPAA and why might this affect your pension decisions?
Legislation introduced in April 2015 gave savers the opportunity to access pension income more flexibly. For example, you could opt for flexi-access drawdown of either Pension Commencement Lump Sum (PCLS), income or both, or opt for a lifetime annuity, or an uncrystallised funds pension lump sum.
However, once you have accessed pension savings flexibly, if you wish to make any further contributions to a defined contribution pension, tax-relieved contributions are restricted to a special Money Purchase Annual Allowance.
Have I accessed my pension flexibly?
If you have started drawing an income from your pension you are deemed to have accessed it, and the MPAA comes into effect restricting future pension contributions from £40,000 pa to £10,000 pa currently.
There are two situations not classed as accessing pensions flexibly:
- Payment from a small lump sum, valued at less than £10,000
- Capped drawdown income from before April 6, 2015 where the maximum amount has not been exceeded.
Why is the government proposing the MPAA reduction?
The government feels reducing the MPAA will limit the recycling of pension benefits which takes advantage of tax relief. HMRC believes that the proposed amount of £4,000 is “fair and reasonable and should allow people who need to access their pension to rebuild them”.The move has not been well received by the pensions industry. During a consultation process, a number of providers have raised concerns and voiced this to the government. We should learn very soon whether these concerns have been taken notice of, or whether the proposed reduction is to go ahead.In the meantime, if you have accessed your pension and are subject to MPAA, it may be wise to maximise your contribution of up to £10,000 before April 5.
If you would like any help and guidance regarding pensions, please get in touch with the team at Hartsfield Trustee Services.