How to avoid being restricted in what can be paid to your pensions

Stewart, who will be 58 next month was made redundant recently where he had worked for 20 years.

He had expected to find new work swiftly and used his redundancy payment of £50,000 to pay off his mortgage.

He has found a new 18-month consultancy job, but it will not start for a few months.  He needs funds for daily needs and is considering withdrawing from his pension.

However, once he starts working again he will be paying back into his pension.  He is worried he will trigger the money purchase annual allowance (MPAA), the limit on the amount he can pay into all his money purchase pensions in any tax year, once he has flexibly accessed one of his pensions.  The allowance is currently £4,000.

 

To avoid paying tax because of the MPAA, Stewart can consider a few different alternatives.  The solution will depend on what kind of pension arrangement Stewart has.  If he has a modern pension arrangement, there may be flexibility in that contract which could help Stewart avoid triggering the MPAA.

Past the Tripwire

Stewart could look at paying benefits that are “small pots”.  This option allows him to withdraw up to £10,000 on three occasions without activating the MPAA.  Certain schemes will allow existing pots to be split in order to allow withdrawals to be made under triviality without touching the remaining assets.

The payment of a pension commencement lump sum (PCLS) would also not trigger the MPAA if the rest is put into a flexi-access drawdown scheme with no income withdrawn.  Stewart could withdraw up to 25% tax-free cash, which would not affect the MPAA.  He could access the PCLS in one go or as a series of withdrawals.  If taken as a series of withdrawals, he could do this until his PCLS entitlement is exhausted.

Stewart should also consider accessing other financial assets first.  It is useful to think of pensions as “first in, last out”.  So, if Stewart or his wife have other assets, such as ISAs, they could access those first.

Joining Forces

He can also consider how his and his wife’s assets are split. Together they should consider whether it would be appropriate for his wife’s pensions to be topped up and if her other assets should be accessed.  By topping up her pension they will have the flexibility to either:

  • Access both pensions without triggering the MPAA, or
  • Access one pension that does trigger the MPAA for one of them, while maintaining the full annual allowance for the other

The main problem with the money purchase annual allowance (MPAA) is the lack of room to plan once it has been triggered, so forward thinking is key.  Advice should also take into account other restrictions that could apply, such as the tapered annual allowance (the reduced annual allowance for high earners) and the alternative annual allowance (the annual allowance for defined benefit pension schemes when the MPAA is triggered.)

This highlights the importance of obtaining specialist advice on pension planning.

How we can help

At McCreas, our job is to simplify this often complex area and help you understand how various types of pensions operate, and what that means for you.

If you would like to arrange an initial free no-obligation meeting to find out more, you can call us on 0141 572 1340 or email enquiries@mccreafs.co.uk.

You can also find some information on Pensions and Retirement Planning here, to get you started.