Money Purchase Annual Allowance Reduction

By 13th June 2017Uncategorised

Discouraging individuals who seek to abuse the flexible pension rules

The Money Purchase Annual Allowance (MPAA) reduced from £10,000 to £4,000 from April 2017. Individuals affected will be those who have entered into flexible access arrangements (if they have taken benefits above and beyond their tax-free cash flexibly) to draw funds from their pension savings and continue to make contributions to money purchase pension schemes.

The MPAA was introduced by the Taxation of Pensions Act 2014 on 6 April 2015. It is designed to discourage individuals who seek to abuse the flexible pension rules to avoid tax and potentially National Insurance contributions by introducing a lower alternative annual allowance where flexibility has been accessed.

Tax charge at the individual’s highest marginal rate

More than 500,000 people who have accessed pension freedoms since April 2015 will see this applied. Contributions above the annual allowance to a money purchase (defined contribution) scheme will attract a tax charge at the individual’s highest marginal rate. The Government estimates the yield from this restriction will be £70 million in 2017/18, rising to £75 million in 2021/22.

Signalling the end of the notion of pension freedoms

This reduction signals the end of the notion of pension freedoms, facilitating a gradual shift from work to retirement where individuals over age 55 facing challenges accessing the labour market could dip into their pension and then return to work and build more pension value.
Individuals considering withdrawals will have to decide whether they are prepared to sacrifice the majority of their pension allowance for doing so.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.


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