Submitted by Sestini & Co
| on Mon, 08/14/2017 - 8:19 | In Pensions
, Tax planning and pensions
A number of significant changes have recently been announced around pensions.
Withdrawals from pensions
In July this year the Government announced that the Money Purchase Annual Allowance (MPAA) reduction from £10,000 to £4,000 will apply retrospectively from 6 April 2017.
This was mooted in the March Finance Bill but was one of the elements to come out in the last-minute ‘pre-election’ changes that the Bill underwent. These and other changes will be brought into legislation through a Finance Act when Parliament returns after the summer recess, in early September.
This affects over 55s who choose to withdraw money from their pension pots but also still want to save into their pensions. Retrospective from 6 April 2017 they will only be able to contribute a maximum of £4,000 per annum and still qualify for tax relief.
Many over 55s are in the situation where they are having to wait until longer than previously thought to be eligible for the state retirement pension which means greater emphasis on their private pension arrangements. For some this also means they are now working longer than they had intended, and continuing to add funds to their retirement plans whilst also taking advantage of the recent option to withdraw lump sums from their funds, for example to pay off mortgages or other loans.
The Lifetime Allowance
On 18 July 2017 the Treasury also announced that the planned decrease to the Lifetime Allowance will go ahead next year. This means that your total pension(s) outside your state pension will be limited to an annual income of £40,000 or a Lifetime Allowance tested at the date of retirement of £1 million (down from £1.25m).
Penalties apply if you go over that amount, of 55% tax if the total value of your UK pensions exceeds £1 million (deducted by your pension scheme administrator and paid by them to HMRC). This also means the maximum permissible tax-free lump sum is £250,000. In addition to these taxes, the monies you take from the pension as income (either through drawdown or an annuity) are also subject to the usual tax regime on income.
It is likely, although not certain, that the Lifetime Allowance will increase on 6 April 2018. This is subject to the Consumer Prices Index (CPI) in September 2017 being higher than it was in September 2016. If that is the case then the Lifetime Allowance will rise by the percentage increase in CPI, rounded up to the nearest £100.
However, this is subject to confirmation by the Treasury each year.
These further restrictions add to the already complex world of pensions and mean it is advisable to take advice well in advance of retirement to ensure pensions are funded as effectively as possible without exceeding the limits and incurring punitive penalties.
If you’d like to discuss the impact these changes could have on your retirement plans and to explore other tax-efficient savings appropriate to your tax position, call us on 01761 241 861 or email us today. We will be pleased to advise you or to invite you into our offices in Paulton, near Bristol and Bath, for a consultation.