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28 February 2017

Who does the new £4,000 money purchase annual allowance affect?

From April 2017 the money purchase annual allowance will reduce to £4,000 for anyone that has started to access their pension flexibly.

Regular readers may have seen previous articles that looked at the new rules introduced by the government in 2015, to allow pensions to be accessed more flexibly. As a brief re-cap, it is now possible to access as much as you like of your pension savings, although tax charges will apply.

With the new rules in place it is increasingly common for people to start to draw down their pensions while they are still working, for example to pay off the rest of their mortgage, or to help their children onto the housing ladder.

So, what is the money purchase annual allowance? For anyone who has started to access their pension flexibly, the usual annual allowance for ongoing pension contributions is reduced from £40,000 to £10,000. From April 2017 this will reduce further to £4,000 per annum.

As a result of these restrictions, those accessing their pensions while still working will not be able to make pension contributions of more than £4,000 a year without triggering an unwanted tax charge. This annual allowance will also apply to any employer contributions made, and not just to personal pension contributions made by the person themselves.

This is essentially to stop people ‘double dipping’ by drawing down money from their pensions and then obtaining tax relief for contributing it back into their pension savings.

So, what is classed as accessing your pension flexibly? Generally speaking, just taking the tax-free pension commencement lump sum will be OK, as the remaining pension remains intact. But, once you start to draw-down on the remaining pension pot then you will be classed as having accessed your pension flexibly.

How will you know if you have started to access your pension flexibly? Pension providers are required to send a flexible access statement to members to notify them that the money purchase annual allowance will now apply. You would then need to notify the providers of any other pension schemes you have, even if you haven’t started to draw on them.

If you are considering accessing your pension savings while still working and making pension contributions then I would urge you to seek advice from your financial adviser before doing so, as once you trigger the money purchase annual allowance there is no way back!

For further advice please contact me.

Key Facts:

  1. The money purchase annual allowance reduces to £4,000 from April 2017 (previously £10,000)
  2. It restricts ongoing pension contributions for anyone who has accessed their pensions flexibly
  3. Accessing the tax-free lump sum should be OK, but once in draw-down it will be triggered
  4. The annual limit applies to personal and employer pension contributions
  5. Seek advice from a financial adviser to avoid triggering the allowance unintentionally

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