The restriction of tax relief on pension contributions has been talked about for many years due to the massive cost to the Exchequer – over £30bn per annum. Successive Governments have tried to balance the tax relief against that cost and we have had a number of restrictions introduced over the years which are causing problems for clients within the tax system. In addition, the complexity of the rules means that many individuals don’t understand whether they are affected or not.
Reductions in the lifetime allowance
This has happened a number of times but, each time, taxpayers are allowed to protect the old limit, often at the expense of making any further contributions. Failure to do so can cause expensive charges to arise in the future. There have been a number of recent cases revolving around late protection claims and whether the taxpayer had a reasonable excuse for missing the original deadline - some appeals are successful, some not.
Reduction of the MPAA
The Money Purchase Annual Allowance (MPAA) rules are aimed at stopping recycling the 25% tax-free lump sum via further pension contributions with tax relief. Broadly, if an individual triggers the MPAA rules, then they have a £4,000 Annual Allowance (AA) for money purchase pension savings.
In general terms, the rules apply to an individual if one of the following occurs in a tax year:
- they drawdown funds from a flexi-access drawdown fund, including receiving payments from a short-term annuity provided from a flexi-access drawdown fund;
- they receive an uncrystallised funds pension lump sum;
- they notify the scheme administrator that they wish to convert their pre-6 April 2015 drawdown pension fund to a flexi-access drawdown fund and they subsequently take a drawdown pension from that fund;
- they take more than the permitted maximum for capped drawdown from a pre-6 April 2015 drawdown pension fund;
- they receive a stand-alone lump sum and are not entitled to enhanced protection;
- they receive a payment from a lifetime annuity where the annual rate of payment can be decreased other than in permitted circumstances; or
- they receive a payment of a scheme pension from a money purchase arrangement where the arrangement is providing scheme pensions to less than 12 members, including dependant’s, at the time the first payment is made.
The tapered AA
Individuals who have income for a tax year of greater than £150,000 have their Annual Allowance (AA) for that tax year restricted. It is reduced by £1 for every £2 of income over £150,000, to a minimum AA of £10,000.
The individual is caught for the tax year if their ‘adjusted income’ is more than £150,000 and the individual’s ‘threshold income’ for the tax year is more than the amount given by £150,000 minus the normal AA for the year i.e. £110,000.
Both terms have quite detailed terms.
You may feel that this is nothing to do with accountants but is an IFA issue. However, the charges arise through the tax system, so it may be worth issuing a reminder to clients.