Whenever the government introduces new legislation, the devil is often in the detail.
With the new pension flexibilities, the government is limiting the extent to which individuals can recycle their pensions income. Accessing these savings – part of which is tax-free – and then simultaneously making a large contribution seems like an obvious abuse of the flexibilities, which is why the government is amending the rules around the Annual Allowance.
From April 2015, when funds from new pension arrangements are drawn in excess of the tax-free cash entitlement, the new reduced money purchase annual allowance (MPAA) of £10,000 will apply. This is one of several events that can trigger an MPAA.
As with any changes to pension legislation a degree of complexity surrounds the new rules.
For example, assuming the MPAA rules are triggered, a £10,000 annual allowance applies but only to the client’s money purchase arrangements.
Assuming the full £10,000 is used up by the mooney purchase arrangement, a reduced £30,000 AA will apply to any defined benefit savings the client may hold. When the reduced AA applies, any unused relief from the previous three years can be carried forward for the DB arrangement. But any unused MPAA cannot be carried forward.
Let us look at a few examples, based upon those used by Revenue & Customs in its draft guidance dated October 2014.
Andrew is a member of a money purchase arrangement and after 6 April 2015 takes an uncrystallised fund pension lump sum (UFPLS). He is therefore subject to the £10,000 MPAA and cannot carry forward any unused MPAA. He has no other pension arrangements.
Andrew makes a contribution of £8,000. As this is below the MPAA there is no charge. If Andrew had exceeded the MPAA he would have been subject to the annual allowance charge on the excess amount.
Jill is a member of both an MP and DB arrangement. Like Andrew, Jill takes a UFPLS and becomes subject to the £10,000 MPAA.
Jill contributes £9,000 in her money purchase arrangement. As this is below the MPAA her total savings are tested against an AA of £40,000, but her MP pension is still subject to the £10,000 limit. Accruals to Jill’s DB scheme are £20,000, which means that her total contributions are £29,000. This is less than £40,000 so no annual allowance charge is due. Jill also has £11,000 unused AA to carry forward – but on her DB arrangement only.
Paul is also a member of both a MP and DB arrangement. Paul has decided to take drawdown from his flexi-access drawdown fund (FADF) and as a result becomes subject to the £10,000 MPAA.
Paul’s contributions to the MP arrangement are £11,000 and as this is more than £10,000, a reduced AA of £30,000 will apply to his DB arrangement. Accruals to Paul’s defined DB total £28,000, which is within the new limit so no charge will apply to that. But Paul is subject to an annual allowance charge on the excess MP savings of £1,000.