It is key that you plot out your retirement income now, so you can life a comfortable lifestyle. Prestige Tax and Trust Services asks: how does the money purchase annual allowance (MPAA) work?
Traditionally, people receive pension income via an annuity. Combining your pension pots, an annuity pays you fixed monthly sums, based on interest rates, for the rest of your life after retirement. You used to be legally obligated to take out a pension annuity but in April 2015, new pension freedoms came into force which give you more options when it comes to accessing your retirement income.
First, you can now legally withdraw 25% of your combined pension pot, after you retire, as a tax-free lump sum. You will then earn steady income as normal, through your annuity. This revenue is taxed via the Pay As You Earn (PAYE) system, so you do not have to send a self-assessment form to HM Revenue & Customs to pay income tax. You have a personal allowance on your annuity revenue, which you do not pay income tax on, which rises after you reach 65, the general age of retirement.
Secondly, you can now withdraw money from defined contribution pensions flexibly. This allows you to remove your money in chunks and if you wish, invest it to make more cash, than put it back in your defined contribution pension pot. You can only put so much money back into your defined contribution pension every year without paying tax on this cash and this is called the MPAA.
The MPAA is currently set at £10,000 per annum. However in the 2016 Autumn Statement, UK Chancellor Phillip Hammond announced that as of April 2017, the MPAA would be reduced to £4,000 per year, “to prevent [savers from accruing] inappropriate double tax relief,” when accessing their pensions flexibly. This basically means that if you want to start taking money out of your pension while still working and saving into your pension in later life, it will now be harder to do so.
Avoiding the change
So is there any way of avoiding falling prey to this new policy? In the short-term, you may want to bring forward any planned large withdrawals from your defined contribution pension to before April 2017. But the MPAA is only triggered when you access your pension flexibly. It does not include taking free money and leaving the rest of your cash in your pension, escalating your annuity or buying a flat.
According to the Telegraph, this can help you avoid triggering the lower MPAA limit, via the ‘small pots’ rule. If your provider allows it, this gives you the ability to take three separate pots worth under £10,000 each from your pension and retain the full £40,000 tax-free allowance, so you avoid the rule.
Prestige Tax and Trust Services
With this new MPAA limit, it is crucial that you plot out your retirement income very carefully, to ensure that you can access pension funds while still saving, to bankroll the cost of care in retirement. You may want to consult experts, so you can ensure that you manage your pension pots appropriately. As experts in this field, Prestige Tax and Trust Services can help you manage your retirement income.