More Pension Unsimplification
After some months of speculation, in June the Government eventually clarified that the Money Purchase Annual Allowance (MPAA) will reduce from £10,000 to £4,000 retrospectively with effect from April 2017.
This means that savers who have accessed their pension 'flexibly' will see their annual tax-free contribution allowance cut from £10,000 to £4,000 for the 2017/18 tax year.
The MPAA is aimed at preventing people from using the flexibilities around accessing a money purchase pension arrangement, to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax-free. It also restricts the ability get tax relief a second time, by withdrawing savings and reinvesting them back into their pension.
The MPAA applies where an individual:
- Takes an uncrystallised funds pension lump sum (UFPLS).
- Takes an income above the maximum GAD limit from an existing capped drawdown arrangement.
- Was in flexible drawdown at any time before 6 April 2015 as a member (not a dependant). (Whether the member had taken income or the flexible drawdown policy still existed at 6 April 2015 is irrelevant).
- Takes Flexi-access Drawdown and then subsequently takes an income.
- Takes a stand-alone lump sum from a money purchase arrangement where they have primary protection and a protected tax-free lump sum greater than £375,000 at 5 April 2006.
The MPAA will not apply when:
- Taking income from an existing capped drawdown arrangement which is within the existing GAD limit.
- Taking a pension commencement lump sum, and buying a lifetime annuity (i.e. not accessing new flexible income options).
- Moving to a flexi-access drawdown arrangement, taking a tax free cash lump sum, but without taking an income.
- Taking a small pots lump sum.
- Taking income from a beneficiary's flexi-access drawdown.
Many people who have used the pension freedoms to access their pension funds have continued to pay into a pension, or their employer has, and it is believed that many of those individuals are completely unaware of the MPAA and will have to pay large tax charges.
Due to the uncertainty of whether the Government would go ahead with the reduction and when this would apply from, even adviser firms had not known whether to make recommendations based on the £10,000 limit or advise clients to reduce their contributions to £4,000.
For those who have been aware of the proposed reduction to the MPAA to £4,000 and chose to continue contributing up to £10,000 in the hope that the Government would as a minimum, postpone the effectual date to April 2018, this will come as a big disappointment and it is anticipated that many will be caught out by this change and will be forced to pay a large tax charge.
Where individuals have triggered the MPAA and have already contributed over £4,000 they will have the same options as those who exceed the annual allowance:
- To pay the tax charge through their self-assessment tax return for 2017/18.
- To ask their pension provider to pay the charge through their pension using Scheme Pays.
Although advisers can alert clients to the limits at the time of taking advice, those who choose not to continue to take advice or review their pensions and drawdown arrangements regularly may be caught out in the future.
Since Pensions Simplification! or should I say complication!, there have been so many changes including changes to the Lifetime Allowance, all the Lifetime Allowance protections which have been made available over the years, Annual Allowance changes, the Tapered Annual Allowance rules, the MPAA and the proposed changes to the minimum pension age, to name but a few. It is argued that the UK pension tax regime is becoming confusing even to the experts and that the individual investor has very little chance of understanding what they can or can't do anymore. It will be hardly surprising to find many of the general public totally unaware of how the current pensions and tax regime applies to them.
As time goes on it is becoming increasingly important to review
all areas of a client's circumstances and to draw their attention
to the consequences of not reviewing all aspects of their
circumstances. We should also make it clear to clients how future
reviews are important, as nobody can predict what the Government
may do next, which may affect decisions which are made now.
Planning for the future needs to be a continual process rather than
a one off event!