Reduction in the Money Purchase Annual Allowance
For adviser use only
After months of speculation and uncertainty, the Government has confirmed its intention to introduce a second Finance Bill in 2017 in order to legislate for policies that had already been announced but which had been dropped from the streamlined Finance Act 2017 rushed through Parliament before the Election.
Within a list of provisions that are confirmed as applying from the start of tax year 2017/18, as originally proposed, is the reduction in the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000 for contributions paid to money purchase arrangements after one or more of the prescribed trigger events have occurred. A full list of the trigger events (and other information on the MPAA) can be found here.
In the Election hiatus, there had been some optimism that the MPAA reduction may be delayed to the start of the 2018/19 tax year or even shelved completely, and as a result clients affected were unclear if they could continue to pay up to £10,000 in 2017/18 or only up to £4,000 as proposed before the annual allowance charge would apply. While it’s disappointing the Government is to proceed with the reduction, adding more complexity and further barriers to pension saving, we do now at least have the certainty of the position and there are a number of tax planning opportunities available to clients (and assuming the client has not triggered the MPAA elsewhere):
Small pots lump sum(s)
A client wishing to take part of their benefits and continue contributions above £4,000 can avoid the MPAA by taking a small pot lump sum or a series of small pots lump sums. Up to three such payments in total are possible from non-occupational schemes subject to certain conditions, set out here. (On a separate but related issue, depending on the pension arrangement it may be possible to split an existing larger pension arrangement into multiple arrangements, or alternatively merge a number of smaller arrangements, to allow small pots lump sums of no more than £10,000 to be paid.)
Scheme pension/lifetime annuity
A client receiving a scheme pension from a defined benefit scheme (and certain defined contribution schemes) will not be subject to the MPAA. And a client receiving a lifetime annuity from a money purchase arrangement where the annuity contract doesn’t allow the client to choose to reduce the amount of their annuity payments will also be unaffected by the MPAA.
Pension commencement lump sum(s)
A client taking only a pension commencement lump sum (PCLS) or a series of PCLS payments without drawing any (flexi-access) drawdown income will delay the MPAA until such times as any income starts to be taken from the arrangement.
A client continuing to take capped drawdown from an arrangement is not subject to the MPAA, although care needs to be taken if the funds automatically convert to flexi-access drawdown, for example, if income is taken above the capped drawdown maximum level, as the MPAA would start to apply.
Capped drawdown transfer
A client intending to transfer their capped drawdown arrangement to another scheme needs to explore the practicalities of the transfer before proceeding. Will the receiving scheme allow the continuation of the arrangement under the capped drawdown provisions (the only circumstances a new capped drawdown arrangement can be set up now) in which case the MPAA will not apply, or will the receiving scheme insist on the funds converting to flexi-access as part of the transfer? If converting, the MPAA will start to apply as soon as any income is taken following the transfer.
A client intending to take benefits that will trigger the MPAA should consider the timing of any proposed contribution and the trigger event. In the first tax year that MPAA applies, only contributions that are paid to money purchase arrangements after the trigger event are measured against the MPAA. For subsequent tax years, all contributions made to money purchase arrangements in a tax year will count towards the MPAA. It may be possible therefore to make a higher level of contribution in advance of the trigger event in order to reduce the impact of the MPAA subsequently applying (although bear in mind the PCLS recycling provisions can apply in certain circumstances and should be factored into the advice process).
Need for advice
Advisers have a great opportunity to guide their clients who are seeking to take benefits and continue building their pension savings through the maze of the MPAA provisions, ensuring those who are affected adjust their pension contributions accordingly (and look at non-pension savings alternatives) and those who may be affected in future consider the full range of options available to avoid, or delay and minimise the impact of MPAA applying.
The value of any tax relief depends on your individual circumstances / the individual circumstances of the investor. This information is based on our understanding of current, taxation law and HMRC practice, which may change.