Flexible drawdown is a way of accessing pension savings flexibly, it is allowable to draw out as much or as little income as is required. The whole pension fund can therefore be drawn as one single payment which is taxed as income at an individual’s highest marginal rate.
The residual fund after payment of any tax free cash (TFC) entitlement can remain invested and could potentially benefit from tax advantaged growth, which could in turn result in greater benefits in the future.
As such, crystallising the TFC entitlement of a Pension in isolation does not trigger the Money Purchase Annual Allowance (MPAA) as it is only once taxable money is withdrawn from the pension pot, using pension freedoms, that the MPAA becomes applicable.
In the interests of clarity it should also be noted that taking income from an existing Capped Pension Income Drawdown arrangement which is within the GAD limit, purchasing a lifetime annuity or taking a ‘small pots lump sum‘ do not trigger the MPAA.
Individuals who flexibly access pension benefits from a money purchase arrangement under Flexi-Access Drawdown are subject to the MPAA and this limits future Pension contributions that can be made to money purchase pension arrangements.
If flexible benefits have been taken from a Pension and the individual wishes to continue paying contributions to a money purchase pension arrangement, then a reduced annual allowance of £4,000.00 (compared to the standard annual allowance of £40,000.00) becomes applicable.
Therefore, the MPAA gives a lower annual allowance for money purchase contributions where flexibility has been accessed and is designed to discourage individuals who seek to abuse the new flexible pension rules to avoid tax and potentially National Insurance Contributions by introducing a lower annual allowance where flexibility has been accessed.
The reduction in MPAA can have significant implications for those who access benefits flexibly and then belong to a pension scheme where the employer pays more than the minimum required by auto-enrolment. It also presents major issues for individuals who are looking to raise capital from their Pension but who have the means and desire to continue funding Pension contributions in future years after benefits have been flexibly accessed.
PAS Financial Planning specialises in financial advice linked to retirement planning and is able to provide investors with the relevant counsel, guidance and appropriate recommendations to help them achieve the financial planning and retirement objectives.
The MPAA can have significant implications on long-term retirement planning because of the significantly restricted allowances available after benefits have been accessed flexibly. Seeking professional advice can allow an individual to understand and navigate this important area so as to ensure that any decisions taken do not result in unwanted consequences that impair on a long term financial strategy.