Still saving after your retirement? What you need to know

Grandparents with their grandsoon

Tax

MoneyPlus Features Team

4th August 2017 at 4:07pm

The government has announced it plans to cut the Money Purchase Annual Allowance, after shelving those plans due to the early general election.

This could affect you if you’ve started to take your pension savings but still make contributions.

Until this year, you could pay in £10,000 a year, but this is due to be cut to £4,000. And it’s due to be backdated to April 2017.

Here’s our helpful guide to the Money Purchase Annual Allowance, what it could mean for you, and tips to help with your future tax planning.

What is the Money Purchase Annual Allowance?

Normally, you can save up to 100% of your yearly income – up to a maximum of £40,000 as your annual allowance – into your pension and get tax-relief on what you pay in.

Some people restricted by the MPAA may have already paid more than £4,000 this year, thinking the allowance would stay at £10,000.

When you start taking an income from your pension, a lower limit can apply. This is called the Money Purchase Annual Allowance.
The reason for this is to prevent people withdrawing money from their pension pot and gaining tax-relief for a second time, when they’ve already benefited from tax-relief on what they paid into their pension over the years.

Read our guide on pension annual allowance.

Will it affect me?

This only affects you if you have a defined contribution pension and you have started to take an income but are still paying into your pension.
You won’t be affected by the £4,000 limit if you are only taking tax-free cash out of your pension, without drawing an income.

You still have your full £40,000 annual allowance. For many people, the first time they dip into their pension savings is the day they stop work. So a drop in the annual allowance might not be an issue for them.

But it could affect you if you plan to phase your retirement, perhaps by cutting your working hours. Another example would be if you have had a break in employment and used your pension savings until you got a new job.

If this is the case, you may still want to keep saving into your pension and keep benefiting from any employer contributions.

Find out more about phasing your retirement and how that might work.

What if I have already paid more than £4,000 this tax year?

Some people restricted by the MPAA may have already paid more than £4,000 this year, thinking the allowance would stay at £10,000.
If you’re one of those people you could face a tax charge. This over contribution will be added to your other income and subject to income tax.

When it comes to smart tax planning, it’s always good to be aware, plan ahead and seek professional advice.

What if I need the flexibility to access my pension but contribute more than £4,000?

It may be possible to keep the full £40,000 Annual Allowance and to dip into your pension savings.

The key to this is to only take the tax-free cash from your pension. However, some older pension schemes may only let you withdraw a combination of 25% tax-free cash and 75% taxable income.

This will trigger the £4,000 allowance.

A modern pension that offers the full range of flexible income options could allow you to take just your tax-free cash. That would let you keep the higher £40,000 annual allowance.

Smart tax planning

The cut to the allowance will be part of the government’s Autumn Finance Bill, but when it comes to smart tax planning, it’s always good to be aware, plan ahead and seek professional advice so that you can make the most of your savings.

The information in this blog or any response to comments should not be taken as financial advice. Laws and tax rules may change in the future and how they affect you depends on your individual circumstances.

A pension is an investment and you may get less back than you paid into it.

The information here is based on our understanding in August 2017.