30 September 2019 | Comment | Article by Lisa Russell

Thinking of taking a lump sum from your pension but continuing to work?

Be careful! If you or anyone else contributes over £4,000 per annum to your pension then you could be caught by the Money Purchase Annual Allowance (MPPA) Charge.

Aegon showed that nearly half of those over 50 earning above £20,000 want to transition into retirement by blending reduced working with partial retirement. People are increasingly either taking lump sums from their pension pot or some income from their pensions whilst continuing to work and both themselves and/or their employers are continuing to contribute.

In April 2017 the MPAA allowance was cut from £10,000 to just £4,000 per annum designed to stop people “recycling” their pension and benefiting from the tax uplift from the Government. 

This means that anyone who has taken any of their pension, whether it be in a lump sum or as an income, may not be allowed to contribute more than £333 per month to their pension, otherwise they will get a penal tax charge.

Another way to look at it is if you are taking an income from your pension but still working, earning £50,000 a year, and together with your employer paying more than 8% into your pension, you would face a MPAA tax bill.

The MPAA won’t normally be triggered if:

  • You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases;
  • you take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it; or
  • you cash in small pension pots valued at less than £10,000.

If you exceed the annual allowance in a year, you won't receive tax relief on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge. 

The annual allowance charge will be added to the rest of your taxable income for the tax year in question when determining your tax liability.

The penalties do not stop there!

If you access any of your pension pot you need to tell any other pension scheme that you are an active member of, that you have accessed your pension savings (excluding any Defined Benefit (or Final Salary) schemes). This notification must be provided within 91 days of receiving the statement or within 91 days of becoming an active member, whichever is the later.

Failure by the member to notify their other pension schemes that they have flexibly accessed benefits can incur a £300 fine and daily penalties of up to £60 for every day the failure to provide this information.

The benefit of these rules does mean that someone who has started to take their pension benefits can still be allowed to benefit from tax relief from pension contributions. 

Independent Financial Advice is paramount when taking your pension benefits, not only to ensure you avoid penalties but to ensure your funds are working as hard as you did to save them.

If you’d like further information on any of the points raised in this blog, please contact Hugh James Independent Financial Advisers.

Sources

https://www.ftadviser.com/pensions/2019/08/13/aegon-calls-for-lift-of-little-known-pensions-cap/ 

https://www.moneyadviceservice.org.uk/en/articles/money-purchase-annual-allowance

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance 

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/ 

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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