Drawing Pension Benefits. What happens if I want to continue to save into a pension?

The new pensions ‘freedoms’ planned for 06 April this year are, in our experience, having a significant impact on retirement decisions being made now. It is refreshing to see renewed interest in pensions, both in terms of saving for them as you will see in the paragraphs below and the way they are drawn.

This blog, we freely admit, is a bit technical, but has some important points for those considering changes to their pension arrangements shortly.

If you are 55 or over and thinking about taking an income from your money purchase (defined contribution or personal pension) pension plan, and you are considering making further pension contributions in the future, it is important to be aware of the implications of going into income drawdown before the end of this tax year, as opposed to post-06 April 2015.

Pension Contributions / Money Purchase Annual Allowance/ £40,000 Limit?

The annual allowance is an HMRC limit on the total gross amount that can be contributed into your pension savings each year from all sources, whilst still receiving tax relief. It is based on your earnings for the tax year and is currently capped at £40,000 gross (2014/15 and 2015/16 tax year).

If a new capped income drawdown plan is started before 06 April 2015, regardless of whether income is taken from the plan before or after 06 April, the £40,000 HMRC annual allowance will still apply providing that, when income is taken, it is within your capped drawdown limit. This limit is set with reference to the Government Actuary Department (GAD) limits for the tax year.

If income above the capped drawdown limit is taken from an existing capped drawdown scheme after 06 April, this will trigger the Money Purchase Annual Allowance (MPAA). The plan will automatically convert to a flexible access drawdown plan and the annual allowance for pension contributions will be reduced to £10,000 gross in the tax year from all sources.

For those who are currently in flexible drawdown plans, and who wish to continue making pension contributions, it may be prudent to consider moving into capped drawdown before 06 April to preserve your entitlement to the £40,000 annual allowance. This is a complex area and we would recommend that you seek independent financial advice from the team at Chapters Financial Limited before proceeding.

Income drawdown plans established after 06 April 2015

If a new income drawdown plan is established after 06 April 2015, this will automatically be deemed a flexible access drawdown plan. The option of capped drawdown will no longer exist. If any income is taken, the MPAA will be triggered and your annual allowance reduced to £10,000.

Once the MPAA is triggered, unused annual allowance brought forward from earlier tax years will not be available to increase the £10,000 annual allowance for money purchase pension savings.

It is important to note that the drawing of tax free cash alone (no income) will not trigger the MPAA.

Can I make pension contributions whilst drawing pension income?

Normally this is possible, although you should seek advice on whether this is an appropriate course of action in your circumstances. You may want to check this with your accountant as an example. If you are in a capped drawdown scheme before 06 April and the level of income you draw remains below your capped drawdown limit, you will retain the £40,000 annual allowance after 06 April. If you are drawing income from a flexible access plan, your annual allowance for pension contributions will reduce to £10,000.

You are allowed to recycle pension income payments back into pension savings, should this be appropriate. However, it is important to ensure that you are only paying income back into a pension plan, and not tax free cash, as this would be treated as an unauthorised payment and taxed accordingly, normally at 40%-55% (and a tax sanction charge to the pension scheme).

Summary

Please note that the Chancellor, George Osborne’s budget is on 18^th March 2015 and could still make changes to pensions legislation going forward. The above is our understanding at this time, based on current planning and proposed legislation.

If you would like advice on your pension planning, whether this be saving for retirement, or drawing benefits of income and tax free cash, then please contact the team at Chapters Financial in either Guildford or Woking who will be able to help you further. No individual advice is provided during the course of this blog.

Vicky Fulcher Msc Dip PFS
Financial planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.