Question on Money Purchase Annual Allowance

Law_man

Hi, hoping someone can clarify this for me.

My wife is a higher rate tax payer. She currently saves 25% of her salary into a work DC pension. Let’s say she contributes £12,500 into her work DC pension every year.

In addition she has a SIPP that has £40,000 in it. She has turned 55 and she wants to take 25% (£10,000) tax free and leave the remainder invested as flexi access Drawdown. Does this impact the amount she can save in her work pension based on the rules governing Money Purchase Annual Allowance?

I believe that the MPAA won’t be triggered as she is not taking an income from the remaining 75%.

Just want to check that this is correct.

Dazed_and_C0nfused

Correct, if it's only the TFLS that is taken then MPAA won't be triggered.

Take 1p flexibly in taxable income and it is triggered

Pablo7474

No to MPAA in this instance but may be worth familiarising yourself with recycling tax free cash rules although these wouldn’t apply if contributions didn’t change. 

Albermarle

Law_man said:

Hi, hoping someone can clarify this for me.

My wife is a higher rate tax payer. She currently saves 25% of her salary into a work DC pension. Let’s say she contributes £12,500 into her work DC pension every year.

In addition she has a SIPP that has £40,000 in it. She has turned 55 and she wants to take 25% (£10,000) tax free and leave the remainder invested as flexi access Drawdown. Does this impact the amount she can save in her work pension based on the rules governing Money Purchase Annual Allowance?

I believe that the MPAA won’t be triggered as she is not taking an income from the remaining 75%.

Just want to check that this is correct.

Is she aware that it is not usually a particularly good idea to take all the tax free 25% , unless you really need the money for something specific ? Even then if she is a higher earner , might be better to borrow £10K and leave the pension alone and still invested for the future .

Law_man

Albermarle said:

Law_man said:

Hi, hoping someone can clarify this for me.

My wife is a higher rate tax payer. She currently saves 25% of her salary into a work DC pension. Let’s say she contributes £12,500 into her work DC pension every year.

In addition she has a SIPP that has £40,000 in it. She has turned 55 and she wants to take 25% (£10,000) tax free and leave the remainder invested as flexi access Drawdown. Does this impact the amount she can save in her work pension based on the rules governing Money Purchase Annual Allowance?

I believe that the MPAA won’t be triggered as she is not taking an income from the remaining 75%.

Just want to check that this is correct.

Is she aware that it is not usually a particularly good idea to take all the tax free 25% , unless you really need the money for something specific ? Even then if she is a higher earner , might be better to borrow £10K and leave the pension alone and still invested for the future .

Yes understand that. She has significant money invested in DC pensions which will be left alone. She will be approaching LTA threshold in next few years assuming there are no massive market corrections. This is just a small SIPP. The tax free cash is being used for a specific purpose and we don’t want to take a loan out.

jamesd

One thing that taking tax free cash does is set the amount of lifetime allowance used at that time. Effectively removing future growth from the portion crystallised until the test on drawdown pot value growth at age 75.

Given that a lifetime allowance charge is envisaged I suggest that she starts the practice of taking 40k of tax free lump sum from DC pensions each year and using that to fund 20k for each of you into a stocks and shares ISA. That'll fix 160k a year at today (or next year etc.) values. The currently envisioned 10k on top of that.

At age 75 the growth in value of flexi-access drawdown pots is checked, each individually. If there's growth then some lifetime allowance or possibly lifetime allowance charge arises. You avoid this one by withdrawing enough so that there is no growth.

If there's a big market drop that'd be a time to crystallise all the rest to reduce the lifetime allowance use.