The fallout from the final Autumn Statement continues, as some people come to terms with a cut in the amount of money they can pay into their pension.
The change will affect people aged over 55 who have taken money from their pension, but also wish to continue contributing, perhaps because they are still working.
Currently, the maximum amount you can pay into your pension is the lower of 100% of your earnings, or £40,000; this is known as the Annual Allowance.
However, if you are over 55 and have already taken money from your pension under the new flexible rules, the maximum drops from £40,000 to £10,000; this is known as the Money Purchase Annual Allowance (MPAA). The MPAA is triggered if you use Flexi Access Drawdown (FAD) or Uncrystallised Funds Pension Lump sum (UFPLS) to access your pension.
Any contributions you make will attract tax-relief and it is here the government is clearly concerned.
The Autumn Statement saw the Chancellor, Philip Hammond, announce a cut in the MPAA to just £4,000. The change will take effect from April 2017 and is designed to “prevent inappropriate double tax relief” where savers get tax-relief on their initial pension contribution, withdraw money from their pension, which is then paid into another pension, attracting a further slice of tax-relief.
The consultation document, released at the same time as the Autumn Statement, said: “The government believes that an allowance of £4,000 is fair and reasonable and should allow people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so. Importantly, however, it limits the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system. The government does not consider that earners aged 55 plus should be able to enjoy double pension tax relief i.e. relief on recycled pension savings.”
The decision will save the government a relatively modest £70 million each year and has been widely criticised. Many experts are concerned that it will impact on the ability of people to retire gradually; taking income from their pension, whilst continuing to work and of course, making pension contributions.
The change will also affect many of those people who have taken money from their pension for other reasons, for example to repay debt or help children financially, yet continue to contribute.
How will the changes affect you?
If you have already taken money from your pension under the new Pension Freedom rules, using FAD) or UFPLS, and triggered the MPAA, you may wish to take full advantage of the existing £10,000 limit before it is cut to £4,000 in April 2017.
Remember too that the new £4,000 limit includes your own and any contributions your employer may make on your behalf.
However, there are ways to take money from your pension, without triggering the MPPA and therefore retain the higher, £40,000 limit.
This will be the case if you only take the tax-free lump sum from your pension. It also applies if you buy an Annuity or use the ‘small pots rule’ to access your pension.
However, if you plan to take money from your pension, and continue contributing, you may wish to consider taking no more than the tax-free lump sum.
If you have triggered the MPPA, or will do in the future, and wish to save more than the lower limit of £4,000 after April 2017 the natural next option is an ISA (Individual Savings Account) which has a more generous £20,000 maximum contribution from next year. Of course, an ISA does not attract any tax relief, but the income and withdrawals are tax free.
This is clearly a confusing and complex area.
Making the wrong decision could prove costly and leave you worse off in retirement. However, the reverse is true, if you or your adviser, know how to use the rules to your advantage.
We are experienced advisers and are here to help you plan your retirement. If you would like more information about the new rules and how they may affect your retirement, please call Bev or Sarah on 0115 933 8433.
We are here to help.
The small print
The information is based on our current understanding of HM Revenue & Customs practice. Any tax reliefs are based on your own individual circumstances and are subject to change.