Meera is a member of a defined benefit scheme. The pension input amount for that scheme in 2022/23 is likely to be £5,000.
She also has a personal pension plan to which she pays £1,500 a month on the tenth day of every month.
On 1 August 2022 she partially crystallises her personal pension, enters flexi-access drawdown and makes a withdrawal. This triggers the £4,000 money purchase annual allowance from that date.
Up to that point she had paid £6,000 in the current tax year to her personal pension (April to July). This doesn’t result in an annual allowance charge as she hadn’t triggered the money purchase annual allowance at that point. However, if she continues to pay £1,500 a month to her personal pension, she’ll pay £12,000 over the rest of the tax year (August to March). This will result in a tax charge on the £8,000 excess over the money purchase annual allowance. To avoid an annual allowance charge, Meera will have to reduce her personal pension plan contributions to £500 a month.
In subsequent tax years, she’ll have to limit her money purchase contributions to £333.33 a month to stay within the money purchase annual allowance or accept that a charge will be due.
If she does reduce her monthly contribution, she’ll have paid £10,000 to her personal pension over the 2022/23 tax year and have a pension input amount of £5,000 in her defined benefit scheme, to which the money purchase annual allowance doesn’t apply. So there will be no annual allowance charge as she didn’t pay more than £4,000 to her personal pension plan after she triggered the money purchase annual allowance and her defined benefit pension input amount is within what’s known as the alternative annual allowance of £36,000.
Lewis has triggered the money purchase annual allowance of £4,000.
The alternative annual allowance available for his defined benefit scheme is therefore £36,000.
He has no unused annual allowance from previous tax years to add to his alternative annual allowance.
In the 2022/23 tax year Lewis pays £6,000 to his personal pension plan and the pension input amount to his defined benefit scheme is £35,000. What is the chargeable amount?
Lewis would have to calculate the ‘alternative chargeable amount’ and the ‘default chargeable amount ’. The annual allowance charge will be based on the higher of the two.
The alternative chargeable amount is the total of the excess of Lewis’s money purchase pension input amount over the £4,000 allowance plus the excess of the defined benefits pension input amount over the alternative annual allowance of £36,000. This would be £2,000 plus £0 = £2,000.
The default chargeable amount is the excess of Lewis’s total pension input amount (the money purchase pension input amount plus the defined benefits input amount) over the annual allowance of £40,000. This would be (£6,000 + £35,000) - £40,000 = £1,000.
The annual allowance charge will therefore be based on a chargeable amount of £2,000.
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All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.