From 6th April 2017, the Money Purchase Annual Allowance will fall from £10,000 down to £4,000 for those who have accessed their pensions and are taking an income. This strategy is clearly aimed at setting the allowance as low as possible without impacting on Auto-Enrolment.
For the purposes of the consultation, the Treasury outlines the situations where 'accessing a pension flexibly' - and therefore the new cap - applies:
- Flexi drawdown including short term annuities.
- Taking a lifetime annuity that allows actual or possible decreases in the amount of annuity payable.
- Taking an uncrystallised funds pension lump sum.
- Those without earnings who cannot normally "recycle" pension withdrawals by putting money withdrawn from a pension back into a pension, although contributions of up to £3,600 can be made, unsupported by earnings.
- A stand-alone lump sum payment, made where the person has primary protection and a protected tax-free lump sum right which is greater than £375,000.
- Where a pension scheme delivers the DC pension directly - a "scheme pension" and there are fewer than 12 individuals receiving a scheme pension.
- Payment of one of the types of benefits listed above is from an overseas pension scheme that has benefited from UK tax relief.
- The MPAA restriction applies from the day after the above trigger event has occurred.
Pension options that do not constitute accessing benefits flexibly include:
- Receipt of a pension commencement lump sum.
- An individual commences flexi-access drawdown, either by a new designation or through conversion of a capped drawdown contract, and does not receive any income.
- An individual holds a capped drawdown contract that was set up before 6th April 2015, and does not receive income above the maximum income limit for the contract after 5th April 2015.
- Receipt of payment from a standard lifetime annuity or scheme pension.
- Receipt of a small lump sum or trivial commutation lump sum.
- Receipt of income from a dependant's drawdown contract.
Once triggered, the restricted allowance applies for the rest of the tax year and each subsequent year. Perhaps most importantly it is not contract-specific: if it applies, it covers all of a client's money purchase arrangements.
If contributions exceed £10,000 in 2016/2017 or £4,000 in tax years from 2017/2018 onwards this will result in an annual allowance excess, with no option to carry forward from earlier years.
The remainder of the standard annual allowance - called the 'alternative annual allowance' - can be used to accrue defined benefits, to which carry forward can be added.
In most cases, the trigger event will occur part of the way through a tax year. As it is only money purchase contributions after this that are tested against the MPAA, that year must be apportioned. Contributions that were paid before the trigger are tested against the alternative annual allowance along with defined benefit accrual; all other contributions are tested against the MPAA. For instance, a monthly contribution to a group personal pension of £1,000 gross paid by a member who triggers the MPAA half way through the tax year will have the following annual allowance test: £6,000 tested against the MPAA; £6,000 tested against the alternative annual allowance.
Subsequent tax years are much simpler because the MPAA applies for the whole year.
With this in mind a good trawl through the client bank is necessary, and all clients approaching the stage where they may access benefits need to be notified that the next 2 months or so is vital to their financial planning, with the option to pay the maximum allowance using carry forward still available, allowing a contribution of up to £170,000.