A number of our clients are wishing to maximise their pension contributions by fully utilising the Annual Allowance (£40,000 for 16/17) and in some cases even higher amounts by carrying forwarding unused relief from the previous three tax years, starting from 6th April 2013. However, since 6th April 2015, a reduced annual allowance of £10,000 has applied in respect of individuals who have flexibly accessed their pension benefits. This is further reducing to a meagre £4,000 from 6th April 2017.
The MPAA was introduced to prevent people, who had accessed their pension benefits flexibly, from claiming tax relief from significant additional contributions and then possibly immediately withdrawing 25% tax free.
It is important therefore to appreciate whether the MPAA applies to you or not when assessing the level of allowable pension contributions. Mistakes can be costly with penal tax charges being imposed.
These are the main times when the MPAA would apply: –
- taking income from a flexi-access drawdown pension;
- taking an uncrystallised fund pension lump sum;
- taking income above the GAD limits from an existing capped drawdown pension;
- being in a flexible drawdown at anytime before 6th April 2015 (whether you have taken income is irrelevant).
The MPAA does not apply when: –
- tax free cash only is taken from a flexi-access drawdown pension with no income;
- buying a lifetime annuity and taking a pension commencement lump sum;
- taking income from an existing capped drawdown pension which is within the existing GAD limit;
- taking a small pot lump sum.
This can be an easy trap to fall into if you are not careful and financial advice should always be sought when considering making pension contributions.