Pension contribution countdown – restriction on contributions from April
In the Autumn Statement, the Chancellor, Philip Hammond announced that he was cutting the MPAA (money purchase annual allowance) in more than half – from £10,000 to £4,000.
The money purchase annual allowance is the amount that you can contribute to a defined contribution pension scheme, after you’ve accessed a pension on a flexible basis. Drawing a pension from a final salary scheme is not classed as accessing a pension flexibly and therefore doesn’t cause the MPAA to apply.
Whilst the Government is still consulting on it, the changes are planned to come into effect in April 2017 – therefore it’s worth acting now, in case the cuts do come into force. Whilst we may find out more detail in the Budget on 08 March, we recommend talking to your adviser now to get the wheels in motion, as a precaution.
In essence, the aim is to prevent people gaining a second round of tax relief by withdrawing savings and reinvesting them into their pension and so acting against “the spirit” of the pension’s tax system.
The Government are trying to restrict those who are earning an income (in PAYE) from drawing down on their pension, and then applying for additional tax relief at 20%, 40% or 45% (with a maximum gross contribution of £10K).
It is believed (according to the Treasury statistics) that they could make £70M from this move during the tax year 2017/18, rising to £75M by 2020/21.
In our opinion, this will seriously impact those who are planning on working later in life, who have started to draw from their money purchase pension but want to continue pension saving. It also makes it even more important to plan ahead.
This move goes somewhat against the Government’s long-term plan of encouraging savers to invest for their retirement, or perhaps a ploy to encourage investors to put their money into ISAs/ LISAs?
It’s important to remember that there are other tax-efficient methods of saving, and it relies on your personal circumstances as to which savings/ investments are right for you.
If you’re currently subject to the MPAA, but still receiving earned income (not savings, dividend or property income etc.) – it’s worth making sure you’ve maximised the current allowance of £10,000 for this tax year, as this may be the last tax year that the allowance is as generous.
It is also possible to receive the contribution made by an employer, in this instance the earned income requirement isn’t crucial.
To discuss your situation and ensure that you don’t lose any valuable benefits, please contact Matthew Bromley, Chartered Financial Planner at Cowgill Holloway Wealth Management.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.