The New Money Purchase Annual Allowance – What You Need to Know

KLOFinancial |

A few months ago, a new pension reduction was announced, which affects the amount of money you can put back into your pension each year if you’ve taken money out of your pension early. Previously the allowance was up to £10,000 a year, and it has now been reduced to £4,000.

The Money Purchase Annual Allowance (MPAA) was announced by the Chancellor in the Autumn Statement last year. The MPAA took effect on and after the 6th April 2017.

How will this affect me?

This will affect individuals who have accessed money from pension savings in a registered pension scheme.

According to the Financial Conduct Authority, people getting early access to their pension has become increasingly common, with 72% of pension funds being accessed early by people aged under 65 and most taking out lump sums since the Pension Freedoms were launched in 2015. It is important to note that the MPAA limit only applies to people who have taken advantage of the new flexible access rules.

If you decide to take from your pension through a drawdown plan of more than a 25% tax-free lump sum or, alternatively, if you withdraw an ‘uncrystallised pension fund lump sum’ (UFPLS), this will activate the MPAA.

Exceptions to MPAA

The exceptions to the new reductions are if you’ve taken money from an existing capped drawdown arrangement, or if you take out a tax-free lump sum and buy an annuity with the remainder of your pension. Another exception is if you were to cash your pension in and it is worth less than £10,000, and lastly, taking an income from a defined benefit scheme.

What happens if I want to top up my pension?

If you were planning on topping up your pension by £10,000, you’re now only allowed to add £4,000. You’ll have effectively lost tax relief contributions on £6,000.

If you’ve taken advantage of the pension freedoms, you won’t be able to get tax relief on contributions above the £4,000 limit. It’s worth noting that you might also get hit with a tax-charge if you have done this.

If you’re looking for financial advice regarding MPAA and what this means for your pension, talk to our financial advice team. Please call on 01926 492406 or email to make an appointment.