Think before you phase your retirement.
If you are planning to retire gradually, you may need to take advice.
“Simplification” was once a word applied to the reform of pension’s taxation. These days, with a nod to the past, pension experts talk about “complification” instead. What started out as relatively straightforward in 2006 has become fiendishly complex as successive Chancellors have attempted to reduce the expense of pension tax reliefs. For 2015/16 their cost was estimated at £38,200 million – a tempting target for the Treasury scissors.
Before the election put a stop to the legislation, the latest example of complification was to have been April’s reduction in the money purchase annual allowance (MPAA) from £10,000 to £4,000. The cut was supposed to prevent double tax relief on recycled pension savings and is likely to reappear after the election.
In practice, you could be caught by an MPAA charge if you and/or your employer contribute to a pension while you are simultaneously drawing from a money purchase pension flexibly.
Should that happen, the effect is that any tax relief on money purchase pension contributions above the MPAA is clawed back via your tax return.
Keith Bonner, Director and lead IFA at HSC Financial Services says…
“Unrelieved pension contributions do not normally make financial sense, so falling foul of the MPAA is best avoided. The £4,000 MPAA was meant to come into effect on 6 April 2017 and may well do so via a post-election Budget. Paying into and simultaneously drawing from a pension most commonly happens if you are phasing your retirement, working part time and supplementing your reduced earnings with payments from your pension.
Such a strategy can be a wise course to take as it avoids the retirement ‘cliff edge’ and may have tax advantages. However, it might also be a necessity if pension provision is inadequate, or retirement from full time employment comes earlier than planned.
It is usually possible to avoid triggering the MPAA if pension benefits are structured properly. However, it is vital to take advice before drawing any benefits from any money purchase pension arrangement as once the MPAA is triggered, you are subject to it throughout life.”
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.