A trick to sidestep this pension allowance cut

Here’s how savvy pension savers can mitigate the consequences of the money purch

Last month the Treasury confirmed the money purchase annual allowance (MPPA) would be cut retrospectively from £10,000 to £4,000 a year, a move that has drawn criticism from various pension experts, including Steve Webb, the former pensions minister.

The MPAA refers to the amount savers can put back into a pension once they have started taking an income from it.

The move to cut the allowance to £4,000 was driven by fears that savers were ‘recycling’ in order to pocket a double helping of tax relief.

But, as various pension experts have pointed out, including Web the reduction ‘flies in the face of efforts to make retirement more flexible’.

-Rising pension deficits: should income investors be worried?

There are ways, however, to sidestep the cut. One option, according to retirement experts from Prudential, is for savers who are drawing down their own pension to invest in their partner’s pension instead. In doing so, pension savers can maintain existing levels of saving by redirecting contributions into a spouse’s or child’s pension.

In Prudential’s case study a basic rate taxpayer takes £10,000 out of their pension. If this person is taxed at 20 per cent, they would be left with £8,000.

If they reinvest this £8,000 in a partner’s pension, the tax relief it attracts increases the contribution to £10,000.

After the partner has taken out their share of tax-free cash (£2,500) from the pension and after the basic rate tax, the partner’s pension would be worth £8,500 (£6,500 plus £2,500) – an increase of £500. retirement experts from Prudential.

Les Cameron, a retirement expert at Prudential, says: ‘The Government’s rationale is to stop people taking money out of their pensions and recycling this to benefit from tax relief twice.

‘Most personal pension contributions benefit from tax relief, effectively adding 25 per cent to each payment. Higher and additional rate taxpayers will also be able to reclaim further tax relief in their tax returns.

‘Reducing the MPAA will save the Government money but pensions savers who have a spouse who isn’t making the most of their pension contributions can increase their family’s overall wealth without falling foul of the rules.’

Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.

Benefits
for basic rate taxpayers

Pension
withdrawal

Amount
after 20%
tax deducted

Amount
reinvested
in spouse’s
pension

Gross
contribution
(after basic rate
tax relief added)

25% tax
free cash
removed

Balance of
fund
less
20% tax

£10,000

£8,000

£8,000

£10,000

£2,500
£7,500 -
£1,500 =
£6,000

Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.