Anyone taking income from a flexi-access drawdown plan or using an uncrystallised funds pension lump sum will trigger the money purchase annual allowance of £4,000.
For those who are lucky enough to have a final salary scheme the full £40,000 annual allowance may still apply. Remember individuals with high earnings may be caught by the tapered annual allowance and have an annual allowance below £40,000.
On 6 April 2017 the money purchase annual allowance reduced from £10,000 to £4,000. However, this only became law on 16 November 2017 when the Finance Act (No.2) 2017 received Royal Assent.
Mainly the two events mentioned above.
But an individual in capped drawdown who either chooses to convert to flexi-access drawdown or exceeds their existing Government Actuary's Department income limits will also trigger it.
|Take pension commencement lump sum only - no income from flexi-access drawdown|
|Take pension commencement lump sum only and income from flexi-access drawdown|
|Take uncrystallised funds pension lump sum|
|Remain in capped drawdown|
|Exceed Government Actuary's Department limit in capped drawdown|
|Take 'small pot'|
1If the amount of annuity can reduce or it is a short term annuity in a capped drawdown plan that's over the Government Actuary's Department limit, the money purchase annual allowance will be triggered. Any other type of annuity won't trigger the money purchase annual allowance.
The money purchase annual allowance applies to all defined contribution savings made by that individual after the date it's triggered. If this occurs part-way through a pension input period only the contributions made after the trigger are tested against the money purchase annual allowance. However the total contributions/accrual in that tax year are also tested against the £40,000 annual allowance or tapered annual allowance.
For the avoidance of doubt, this includes contributions made to any other defined contribution plans the individual has in addition to the one they've taken benefits from.
Accrual under defined benefits schemes is not tested against the money purchase annual allowance, but will be included in the test of total contributions against the annual allowance/tapered annual allowance:
A client enters flexi-access drawdown and takes income. He then contributes £3,500 to his defined contribution arrangement, while defined benefit accrual is £32,000. The tapered annual allowance does not apply.
An alternative annual allowance of £36,000 applies to the defined benefit savings, but is only required where the annual allowance is breached.
It's not possible to carry forward unused tax relief against the money purchase annual allowance. Defined contribution contributions must be limited to £4,000 to avoid an annual allowance tax charge.
It is however possible to carry forward unused relief against the full annual allowance if it still applies:
The client in the example above makes defined contribution contributions of £4,000 and his defined benefit accrual is now worth £38,000.
If defined contribution contributions exceed the money purchase annual allowance a tax charge will be due.
The default chargeable amount is the excess over the annual allowance. However there is also a second test for the alternative chargeable amount to ensure the excess defined contribution contributions are not simply offset against defined benefit savings. This is the excess over the money purchase annual allowance added to the excess over the alternative annual allowance of £36,000. The taxable amount is the higher of the two calculations:
Another member of the scheme enters flexi-access drawdown and takes income. He then contributes £6,000 to his defined contribution arrangement, while his defined benefit accrual is £35,000.
The taxable amount is the higher of the alternative chargeable amount (£2,000 + £0) and the default chargeable amount (£1,000).
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
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.