One pre-election promise that’s here to stay
Despite dropping the clause reducing the MPAA from £10,000 to £4,000 on 25 April 2017, in order to help get the Finance Bill 2017 to come into force before Parliament dissolves on 3 May, the Government did promise that it would re-introduce the dropped clauses after the general election (assuming they got re-elected). Although it may not have made campaign headlines at the time, it’s certainly worth looking at now.
As we stand right now, the clause has been re-introduced with retrospective effect back to 6 April 2017. With a reduction in the MPAA from £10,000 to £4,000. Although the current Annual Allowance rules are not replaced by the MPAA, nor does it reduce the normal annual allowance.
So what do the changes mean?
Ever since 6th April 2015, it has been possible to access all of your Money Purchase Pension Savings, following the reforms known as ‘Freedom & Choice’.
However there is a catch, as accessing your entire fund will result in those monies (with the exception of the tax-free cash) becoming subject to income tax; with this possibly being charged at a rate that could be higher than you usually pay.
What triggers the changes to the MPAA?
The MPAA applies when your pensions flexibility has been accessed. However this will only be significant where there is £4,000 or more total contributions to a money purchase arrangement in a Pension Input Period.
This accessing flexibility is referred to as a ‘Trigger Event’ and can be defined in the following examples:
Uncrystallised Fund Pension Lump Sum (UFPLS)
This occurs when you access your pension fund via an UFPLS.
Flexi-access Drawdown Income
Any designation of funds for flexi-access drawdown doesn’t necessarily trigger the MPAA, nor does the payment of a PCLS. Having said that, once any income (or any lump sums from the designated pot) is taken from the funds designated to a flexi-access drawdown plan, the MPAA applies.
It’s important to note that, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit, then the MPAA is not triggered. Just to clarify disqualifying pension credits are pension credits from divorce pension splitting orders.
Capped Drawdown Income Above Cap
If you were in “capped drawdown” on 5 April 2015 you can then continue in capped drawdown. The existing system for reviewing and calculating the cap is expected to remain in place. It is only if you then choose to take an income in excess of your cap that the MPAA will apply.
Existing Flexible Drawdown
If you had flexible drawdown fund before 6 April 2015, then that is treated as having accessed flexibility on 6 April 2015 as your drawdown became flexi-access on this date.
In some circumstances where a stand-alone lump sum is paid out from 6 April 2015 the MPAA will also apply.
What happens when the trigger is pulled?
Once the trigger occurs, then the MPAA applies from the day after the trigger event. The only exception to this is any pre-6th April 2015 flexible drawdowns, which invoked the restricted allowance immediately from 6th April 2015.
So What’s The Tax Implication To You?
With the new annual allowance at £4,000 there are bound to be many more scheme members having to pay an excess tax charge. With these extra charges being paid direct to HM Revenue & Customs after the end of the tax year.