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Reducing the money purchase annual allowance

The Autumn Statement, delivered by the Chancellor of the Exchequer Philip Hammond, included an announcement that the money purchase annual allowance will be reduced from £10,000 to £4,000 in order to prevent inappropriate double tax relief.

HM Treasury has issued a consultation document, on the subject, to seek the views of interested parties about the proposed reduced level of money purchase annual allowance and how it might impact on automatic enrolment, or disproportionately affect any particular groups of individuals.

Prior to April 2015 a limited form of pension flexibility was available and individuals who used it were prohibited from making further contributions to defined contribution schemes. This prevented claiming secondary tax relief by withdrawing and reinvesting pension funds, considered to be acting against the spirit of the pension tax system. It also prohibited tax-relievable pension contributions from salary and the immediate withdrawal of the tax-free element.

Prior to the introduction of the new pensions flexibilities, the Government identified a need to provide individuals who had a change in circumstances following the withdrawal of pension benefits, the chance to rebuild their pension savings. As a result the money purchase annual allowance was introduced as part of the new pension flexibilities in April 2015, with the intention to restrict tax-relieved contributions to defined contribution pension schemes once an individual had accessed their pension savings. At that time the Government believed an allowance of £10,000 was appropriate.

Although the current money purchase annual allowance limit reduces the risk of individuals not acting in the spirit of the pension tax system it does not eliminate them. The Government now believes a revised allowance of £4,000 is a more realistic amount to allow individuals, who need to access pension funds, the opportunity to rebuild them. This will also limit the level of tax relief that can be claimed on contributions.

Responses to the consultation are required by 15 February 2017, which will inform legislative changes due to take effect from April 2017.

The money purchase annual allowance is triggered by the following events.

The following payments will not trigger the money purchase annual allowance.

Next steps

New legislation is being drafted to incorporate this change. More details will be available when the legislation is available for review.

Further information can be found within HM Treasury’s ‘Reducing the money purchase annual allowance consultation’ document at:

Should you have any queries relating to these changes, or how they could affect future retirement provision, please contact us.

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