Pension cap exception may benefit divorcing pension holders
A little-known exception to Money Purchase Annual Allowance rules may be used, where applicable, to benefit pension holders. Steve Webb, Director of Policy at Royal London, has pointed out that this might be of particular advantage to those seeking to access funds, for example, on divorce.
Royal London notes that since the introduction of ‘pension freedoms’ in April 2015, savers aged 55 or above have been able to take money out of their pensions in ‘chunks’ rather than turn the whole pension pot into an income for life by buying an annuity. To prevent people from repeatedly taking money out, benefiting from tax free cash, and putting money back in again with the benefit of tax relief, HMRC introduced a limit (known as the Money Purchase Annual Allowance or MPAA) on the amount people could put back in to pensions once they had started drawing taxable cash. The limit is currently £4,000 per year.
However, the rules permit the withdrawal of the entire fund of a ‘trivially’ small pension pot under £10,000 without triggering the MPAA.
Steve Webb advises that if an individual has two pensions and wants to withdraw less than £10,000, they should consider cashing in a small pot in full rather than taking a partial withdrawal from a larger pot, as this avoids triggering the MPAA. As a result, they retain the ability to put up to £40,000 into a pension each year in future, rather than having this slashed to £4,000.
Steve Webb comments:
“Last year, over half a million people aged 55 or over made flexible withdrawals from their pension, and many of these withdrawals will have been for amounts under £10,000. If they emptied out a small pot then this will have had no impact on their future ability to save into a pension. But if, by mistake, they took the same amount as a partial withdrawal from a bigger pot, they risk triggering stringent HMRC limits on future pension saving. Those with more than one pension pot should consider very carefully the order in which they access these funds, especially if they may want to contribute into a pension in future.”
For the full news item on the Royal London website, click here.