The key merit of staying in capped drawdown comes if a client’s circumstances have changed significantly and they want to put a good deal of new money into their pension having started benefit crystallisation, that is, drawing on the pension.
In this scenario in capped drawdown, you still have a £40,000 MPAA so you can pay that much each year into your income drawdown policy tax free.
However, in flexi-access drawdown you are reduced to the much less generous £4,000 MPAA.
Exceeding your capped drawdown maximum in a given year automatically defaults you into flexi-access drawdown, triggering that new MPAA reduction. Most drawdown policy providers carry out switches to the flexi-access drawdown arrangement free of charge today.
• The annual allowance has also fallen and been further reduced by tapered annual allowance.
If you are a UK taxpayer, in the tax year 2018-19, you will get tax relief on pension contributions of up to 100 per cent of your earnings or a £40,000 annual allowance, whichever is lower. This number was £50,000 until 2014-15. Increasing numbers of individuals are now exceeding their annual allowance.
HM Revenue & Customs figures from September 2018 show that for the 2015-16 tax year, total annual allowance breaches cost UK taxpayers £179m. This jumped to £561m in 2016-17, in the year the tapered annual allowance for high earners came into effect.
While the government does not separate how much of the tax revenue came from high earners on a tapered threshold from revenue generated by the standard annual allowance, it suggests the taper rules brought in from April 2016 may have had a significant impact on the tax take.
The tapered annual allowance for high earners means high earners have less than £40,000 annual pensions contribution allowance – tapering down to a mere £10,000 with total earning levels. This calculation is so complicated that the former pensions minister, Steve Webb now advocates ending the taper.
• The lifetime allowance has been one of the most volatile features of the pensions simplification regime.
Introduced back in 2006 with a £1.5m starting point, it has been as high as £1.8m and as low as £1m, making planning difficult for advisers and clients alike.
For next year (2019-20) it will be £1.055m. So, it increasingly hits the mass affluent, not just the rich. The additional tax charges on those exceeding the LTA now raise over £100m per year for the Treasury.
The LTA charge applies to members who have benefits in excess of the LTA when benefits are taken.
