One of the measures announced in the March 2017 Budget was the reduction in the annual Money Purchase Allowance (MPAA) from £10,000 to £4,000. This measure was subsequently dropped from the pre-election Finance Bill, but as expected, has now been included in the second Finance Bill of 2017 published earlier this month. Once the second Finance Bill receives Royal Assent, this measure will have effect from 6 April 2017.
The MPAA effectively stops an individual accessing a money purchase pension arrangement to divert their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax-free. The reduction in the MPAA to £4,000 further restricts the amount of tax relieved contributions that can be made by an individual.
The government has indicated that this measure has been put in place to prevent inappropriate ‘double tax relief’ by those aged 55 and over who have already taken money from their pension pots. The change reduces the amount of pension savings that can be recycled to take advantage of tax relief, which is not within the spirit of the new flexible pension rules.
These changes will also affect the available options for those who have already started drawing a pension to add more than £4,000 per year to their pension pots. We recommend that you take pensions and tax advice if you are affected by these changes.