Millions fall foul of pensions contributions rule

Almost a million savers could face punitive tax charges on their pension contributions because they have unwittingly triggered a substantial reduction in their annual contributions allowance.

948_MW_P25_Pensions

Part-time work could boost your pension contributions tax bill

The money purchase annual allowance has had some unintended consequences

Almost a million savers could face punitive tax charges on their pension contributions because they have unwittingly triggered a substantial reduction in their annual contributions allowance. Between April 2015 and September 2018, 980,000 people made flexible withdrawals from their pension fund, according to pension provider Just Group.

They may now fall foul of the money purchase annual allowance (MPAA). This rule reduces the normal £40,000 annual allowance on pension contributions by a factor of ten. If you go over £4,000, you are taxed at your highest rate of income tax on the excess.

The MPAA was introduced alongside the pension freedom reforms of April 2015 to prevent people making withdrawals from their savings only to immediately reinvest this money to claim extra tax relief. However, it is now catching people out in ways policymakers didn't anticipate. Some people, for example, have taken advantage of the pension freedoms to move into part-time work, making withdrawals from their pension savings to maintain their income but continuing tocontribute.

People with irregular earnings, including the self-employed and directors, have also dipped into pension funds in order to smooth out their income, but have every intention of continuing to save. Even those taking an income but not expecting to make further contributions may change their mind if their circumstances change because they receive a pay rise, say.

When does it apply?

The MPAA will also apply if you move your savings into a "flexi-access drawdown scheme" and begin taking an income, or if you just cash in your entire pension as a lump sum, though there is an exception for those cashing in small funds worth less than £10,000. Savers buying investment-linked annuities offering variable levels of income are also caught but not those with conventional annuities with a guaranteed level of income for life.

Finally, note that savers affected by the MPAA don't even have the option of using the carry-forward rules, which allow most people to mitigate their exposure to tax by bringing forward unused pension contribution allowances from the previous three years.

Recommended

What’s in Biden’s global corporation tax proposals?
Global Economy

What’s in Biden’s global corporation tax proposals?

US president Joe Biden’s administration recently proposed a universal model for taxing global companies. Saloni Sardana looks at what's involved.
13 Apr 2021
The minimum pension withdrawal age is set to rise – don’t get caught short
Pensions

The minimum pension withdrawal age is set to rise – don’t get caught short

From April 2028, the earliest age at which you can take money from your pension savings will rise to 57. It's vital that you understand the detail of …
13 Apr 2021
Will Shu: Deliveroo CEO and its first delivery rider
People

Will Shu: Deliveroo CEO and its first delivery rider

City analyst Will Shu was sick of working long hours at Canary Wharf and having to make do with what was left on the shelf in Tesco for dinner. So he …
10 Apr 2021
International tax competition is under threat – which stocks are most vulnerable?
Global Economy

International tax competition is under threat – which stocks are most vulnerable?

The idea of a global corporate tax regime is taking off, with the US proposing a sales tax on multinationals. John Stepek looks at which companies cou…
8 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021