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Mind the (MPAA) gap!

The much talked about pension freedoms became a reality in April following last year’s Budget announcement, but with the new rules came something else that was new too - the Money Purchase Annual Allowance, or MPAA for short.

Anyone accessing a lump sum from their pension savings will be subject to income tax at their marginal rate over the 25% tax free sum, but thereafter they will also be restricted to an annual allowance of just £10,000 on any future pension contributions.

Of course, not everyone in retirement will be contemplating further pension contributions, but below we have summarised some key scenarios as there are some situations where the MPAA can be an advantage. As always, we strongly recommend that you discuss these with your financial adviser before taking any action.

Capped drawdown

To have a capped drawdown arrangement you must have accessed some or all of your pension savings pot in order to release your entitlement to tax free cash, and have done so by 5th April 2015.

Within this type of arrangement, your remaining funds will still be invested and the value may be subject to stock market fluctuations.

You may or may not be taking an income from your remaining pension fund, but any income is capped at a maximum level of 150% of GAD (Government Actuarial Department tables). These tables are based upon underlying gilt yields, but you must not breach the 150% threshold or you will be automatically converted to a new Flexible Access Drawdown which is detailed below.

Remaining in capped drawdown comes with an advantage.  Not breaching your pre-set limits means the MPAA does not apply and instead you retain the ability to make pension contributions of up to £40,000 per annum (subject to earnings) which can be carried forward for up to three years.

If you do breach the cap, you will become subject to the MPAA and will be restricted to making further money purchase contributions subject to a maximum of £10,000 per annum.

Flexible drawdown

If you previously held a flexible drawdown arrangement you will have had to demonstrate that you were in receipt of secured income from other sources of £20,000 per annum (subsequently reduced to £12,000 in March 2014).

Following implementation of the new pension rules your plan will have been automatically converted to a new Flexible Access Drawdown (FAD).

Under your existing arrangement, you were not previously allowed to make further contributions into a pension scheme, but from 6 April 2015 the MPAA will apply,  which means that you can contribute up to £10,000 per annum.

Other pension arrangements

The pension reforms introduced a new product - Uncrystallised Funds Pension Lump Sum (UFPLS), which allows access to lump sum withdrawals from your pension savings without committing to a drawdown arrangement or an annuity as had been the case previously.

When you withdraw a lump sum from UFPLS you will be subject to the MPAA and subsequent pension contributions will be limited to the MPAA maximum of £10,000 per annum.

Annuities are a viable option as they still offer the security of a known level of income, but rates remain at historical lows and many retirees are considering their options before taking the plunge. There are hints of new developments in the annuities arena and the Government’s proposals to make sale of existing annuities via a secondary market appear to be gathering momentum, although as yet these don’t appear to have moved much beyond the drawing board stage.

Purchase of a new annuity also means that the £10,000 MPAA limit will apply to future pension contributions.

The increased retirement options flexibility is good news for many, but the greater choices available has also led to more complexity. Given that decisions at retirement can influence lifestyle for the rest of your days, obtaining professional advice has never been more important.

If you’d like to discuss your situation and the options available, please contact one of our Financial Planning Consultants on 0808 144 5575 or email: help@armstrongwatson.co.uk.

Click here for a copy of your free essential guide to the new pension freedoms.

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