Advisers can prevent clients from triggering the money purchase annual allowance (MPAA) by ensuring they draw money from small pension pots of £10,000 and under, according to new analysis from Royal London.
Advisers can prevent clients from triggering the money purchase annual allowance (MPAA) by ensuring they draw money from smaller pension pots, according to new analysis from Royal London.
A little-known tax rule, which applies to small pension pots of £10,000 and under, means savers can withdraw money without triggering the MPAA while those who are unaware of the rule may withdraw money from the ‘wrong’ pension pot, slashing their ability to save into a pension in the future by up to 90%.
Since the introduction of pension freedoms in 2015, savers aged 55 and over have been able to take money out of their pensions in chunks rather than turn the whole pension pot into an income for life by buying an annuity. HM Revenue & Customs (HMRC) introduced the MPAA to limit the amount people could put back in to pensions once they had started drawing taxable cash.
The idea was to discourage people from ‘recycling’ money in and out of pensions by restricting subsequent pension contributions to £4,000 a year, lowered from £10,000 in 2017.
However, a little-known tax loophole means those who take everything out of a ‘trivially’ small pension pot of under £10,000 do not trigger the MPAA, while those who take even small amounts from a larger pot find their future contributions restricted.
For example, if an individual has two pensions and wants to withdraw less than £10,000, they can cash in the entirety of a small pot with no penalties rather than taking partial withdrawals from a larger pot, which would trigger the MPAA.
Steve Webb, director of policy at Royal London, said: ‘Last year, over half a million people aged 55 or over made flexible withdrawals from their pension, and many of these withdrawals will have been for amounts under £10,000.
‘If they emptied out a small pot then this will have had no impact on their future ability to save into a pension. But if, by mistake, they took the same amount as a partial withdrawal from a bigger pot, they risk triggering stringent HMRC limits on future pension savings.
‘Those with more than one pension pot should consider very carefully the order in which they access these funds, especially if they may want to contribute into a pension in future.’
If a client triggers the MPAA, they have three months to notify their active pension scheme that the lower limit applies. Failure to do so incurs a fixed penalty of £300, which then accumulates a daily penalty of £60.