Since 6 April 2015, a reduced annual allowance of £10,000 in respect of money purchase pension contributions, known as the money purchase annual allowance (MPAA), applies to individuals who have flexibly accessed their pension benefits. The MPAA rules were intended to discourage individuals from diverting their salary into their pension with tax relief and then immediately withdrawing 25% from their pension tax-free. If an individual triggers the MPAA, their annual allowance reduces from £40,000 to £10,000.
The Chancellor of the Exchequer in his Autumn Statement announced that the MPAA will now be cut from £10,000 per annum to £4,000 per annum. This reduction is due to come into force from April 2017. This means that over-55s who start accessing their pension pots will only be able to take £4,000 per year and still qualify for tax relief from next April, rather than £10,000 at present.
Ex-Pensions Minister Steve Webb has said that the new £4,000 limit is unfair on older people who want to carry on working and saving. Mr. Webb went on to state that this cut ‘flies in the face of efforts to make retirement more flexible’.
In the context of divorce, this means that anyone considering using a drawdown to fund a divorce settlement needs to think long and hard about the tax consequences and also the restricted ability to ‘rebuild’ their pension fund following the drawdown in the event that this takes place post April 2017. In the interim, anyone who is already affected by the MPAA should consider utilising the maximum contribution of £10,000 before April 2017.
The information outlined above is general guidance on pension changes and is not financial advice. If you need more details on your rights or about what action to take given your financial circumstances you will need specialist advice from an independent financial adviser. Whether you need advice relating to a personal pension or a business pension scheme, we can help. We have access to a network of other professionals with whom we work closely, including independent financial advisers and pension specialists