What is the annual allowance?
The annual allowance is a limit to the total contributions that can be paid into defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes.
The annual allowance is currently capped at £40,000 although a lower limit of £10,000 may apply if you have already started drawing your pension. The annual allowance applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you or your employer pay or anyone else who pays on your behalf.
When does MPAA apply?
HMRC introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the new flexibility rules.
It is only when pension benefits have been flexibly accessed that the MPAA of £10,000 will apply. This includes various different options (known as trigger events) such as:
- Taking an uncrystallised funds pension lump sum (UFPLS).
- Taking income above the maximum GAD limit from an existing capped drawdown arrangement.
- Being in flexible drawdown at any time before 6 April 2015 as a member (not a dependant). [Whether they have taken income or the flexible drawdown policy still existed at 6 April 2015 is irrelevant].
- Going into flexi-access drawdown from an existing capped drawdown arrangement or with uncrystallised funds and then subsequently taking income.
- Taking a stand-alone lump sum for an individual who has primary protection with associated registered tax-free cash.
What is the proposed change from 6 April 2017?
The government announced in its Autumn Statement on 23rd November 2016 that it’s proposing to reduce the MPAA from £10,000 to £4,000 with effect from 6 April 2017. A 12 week consultation, seeking views on the possible impact of this reduction, is running until 15th February 2017. Chancellor Philip Hammond said the decision is in order “to prevent inappropriate double tax relief”.
The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits and so any previous savings are not affected.
Please note this article is for information purposes only.