Tax free allowances
There's a limit to the amount you can invest in pension plans every year before you are taxed on your contributions. It's set by the Government and its called the annual allowance.
It's not as easy as counting the contributions you make in the tax year, 6 April to the following 5 April. It's the contributions you make during what's known as a pension input period (PIP) that count. This may be the same as the tax year, but it may not, so you should check with your financial adviser or pension provider who will tell you what your PIP is.
The annual allowance which applies is based on the tax year that your PIP ends in. For example, if your PIP runs from 1 December 2014 to 30 November 2015, it would end in the 2015/16 tax year. The annual allowance for the 2017/18 tax year is £40,000, which means you could contribute £40,000 before a tax charge may apply.
If you've already taken some of your retirement savings, your future pension contribution limit may be restricted to the money purchase annual allowance (see below).
Money Purchase Annual Allowance
The money purchase annual allowance (MPAA) is lower than the annual allowance and it may apply if you choose to flexibly access your retirement savings from 6 April 2015.
The Government has introduced the MPAA to make sure there’s no room to abuse the tax relief that can be claimed on any new pension contributions by those who have taken some or all of their retirement savings.
If you choose to access your retirement savings flexibly, certain payments will trigger the MPAA. This means your annual allowance for contributions into defined contribution arrangements would be reduced from £40,000 to £10,000 a year.
- If you choose to take an income from a flexi-access drawdown plan set up from 6 April 2015.
- Taking a full or partial cash lump sum withdrawal from your plan.
- Taking an income above the maximum limit from an existing capped drawdown plan.
- Receiving a one-off lump sum if you’re entitled to enhanced protection with protected tax-free cash of more than £375,000.
- Taking your 25% tax-free cash sum.
- Cashing in small pots.
- Taking an income from a capped income drawdown plan that’s within the maximum limits.
- Additional designation from an existing capped income drawdown plan.
- Buying a lifetime annuity.
We'll let you know within 31 days of the MPAA being triggered.
You'll have 91 days to inform all pension plans you’re contributing to that the MPAA has been triggered. If you join any new pension plans, you’ll have a responsibility to let them know.
If you're a member of a defined benefits scheme and you've triggered the MPAA, the £40,000 annual allowance still applies to your total contributions/accrual. However, within your total £40,000 annual allowance, the maximum you can pay into any defined contribution plans will be £10,000 before a tax charge applies.
The 2017 Spring Budget did include plans to reduce the MPAA to £4,000, however, this was not included in the Finance Bill/Act 2017. It is not clear if/when the reduction will be reinstated.
We recommend you speak to a financial adviser if you think this applies to you.
There's a limit to the amount you can have built up in any pension plan when you start taking your retirement benefits. It's set by the Government and it's called the lifetime allowance. If you exceed this limit, you may be subject to a lifetime allowance charge.