Is timing of date of triggering annual allowance reduction important?

pensionpawn

Probably short thread.

Does the date of entering draw-down and the associated triggering of the drop in annual allowance to £3k6 proportionally impact the annual allowance reduction? For example, if you squirrelled away £20k into your pension between April and Feb and then accessed your your pension via drawdown before the new tax year have you just given yourself a big tax problem? Cheers in advance.

jamesd

There are no restrictions on pension contributions due to the MPAA itself until the date you trigger it by flexibly taking money, which doesn't include merely taking a tax free lump sum. But you get a 36k allowance before the trigger and 4k after. So get most of your pension contributions made, then trigger.

The MPAA is £4,000 not £3,600. £3,600 is the gross amount you can pay into pensions if your qualifying earnings are lower than £3,600.

Linton

pensionpawn wrote: »

Probably short thread.

Does the date of entering draw-down and the associated triggering of the drop in annual allowance to £3k6 proportionally impact the annual allowance reduction? For example, if you squirrelled away £20k into your pension between April and Feb and then accessed your your pension via drawdown before the new tax year have you just given yourself a big tax problem? Cheers in advance.

Interesting question. In practice you certainly can drawdown taxable money after making a large contribution to your pension in the same tax year without extra tax being imposed. Lots of people do this. But why it is OK I do not know since tax usually operates on an annual basis. For example you can make a pension contribution before you have the earnings to support it.

Does the MPAA reduction only apply in the following tax year, or is this one case where transaction dates are taken into consideration?

Pension_Geek

Linton wrote: »

Interesting question. In practice you certainly can drawdown taxable money after making a large contribution to your pension in the same tax year without extra tax being imposed. Lots of people do this. But why it is OK I do not know since tax usually operates on an annual basis. For example you can make a pension contribution before you have the earnings to support it.

Does the MPAA reduction only apply in the following tax year, or is this one case where transaction dates are taken into consideration?

Once you trigger reduced MPAA, it applies forever.

Linton

Pension_Geek wrote: »

Once you trigger reduced MPAA, it applies forever.

Yes, but the question the OP is asking is whether the effect can be retrospective in the one tax year. My answer is that it is not but I do not see why taking into account HMRCs reatment of pensions on an annual basis. How does the MPAA reduction apply if imposed in the middle of a tax year when a significant pension contribution has aleardy been made?

Pension_Geek

Linton wrote: »

Yes, but the question the OP is asking is whether the effect can be retrospective in the one tax year. My answer is that it is not but I do not see why taking into account HMRCs reatment of pensions on an annual basis. How does the MPAA reduction apply if imposed in the middle of a tax year when a significant pension contribution has aleardy been made?

I agree, it seems a bit of an anomaly.

Brynsam

Linton wrote: »

Yes, but the question the OP is asking is whether the effect can be retrospective in the one tax year. My answer is that it is not but I do not see why taking into account HMRCs reatment of pensions on an annual basis. How does the MPAA reduction apply if imposed in the middle of a tax year when a significant pension contribution has aleardy been made?

Because that's what the legislation says. I guess the legwork involved in reclaiming tax for the whole year in which the MPPA is triggered is beyond HMRC's systems! It is triggered from the day on which someone flexibly accesses their pension and is not retrospectively applied to any 'significant pension contribution' already made in that tax year.

Pension_Geek

I always thought the rules were to stop people from recycling too much pension income.

Something that I always wondered why the limit was £4,000 and not £3,600...

Paul_Herring

Something that I always wondered why the limit was £4,000 and not £3,600...

It's tax. Why make it simple, easily comprehensible and internally consistent, when it can be fit into another 50 pages of legislation instead?

pensionpawn

Thanks for all the interesting replies everyone. So, just for clarification, the reduced annual allowance is £4k? I thought it was £3600 because of the number of references I have seen to £2880 being grossed up to £3600? I have never reconciled the difference between these three amounts.

Also, if the reduction only applies from the trigger date does it stand to reason that in this particular financial year you could contribute £36k to trigger day and continue to contribute £4k after it?

Pension_Geek

pensionpawn wrote: »

Thanks for all the interesting replies everyone. So, just for clarification, the reduced annual allowance is £4k? I thought it was £3600 because of the number of references I have seen to £2880 being grossed up to £3600? I have never reconciled the difference between these three amounts.

Also, if the reduction only applies from the trigger date does it stand to reason that in this particular financial year you could contribute £36k to trigger day and continue to contribute £4k after it?

£3600 is the maximum you can put into a pension unless your relevant earnings exceed this amount. If you pay £2,880, the amount that goes in is £3600.

Reduced MPAA is £4,000. It has no relation to the £3,600 figure. It would have been tidier to have made the reduced MPAA the same as the £3600, but there you are.

Re the second point, you could provided you had sufficient earnings to do so. Aegon have an example of that on their website (which is meant to be for advisers, but as Matilda says, sometimes you have to be a little bit naughty).