Does getting an annuity from pension after taking tax free lump sum trigger MPAA?

dharm999

If I take the 25% tax free lump sum from my pension, then leave the remaining 75% untouched, and then at some point in the future, say 10 years later, I buy an annuity with this money, does that trigger the MPAA?  We will have surplus income, and I’m trying to work out the most tax efficient way to pass it on.  As my pension, won’t count as part of my estate for IHT purposes, then it makes sense to me to take advantage of that, and keep putting money in to my pension after I go into drawdown.  Am I overthinking this and missing something obvious.

Thanks

Linton

Taking an annuity does not trigger the MPAA. The MPAA is only triggered uf you take a cash lump sum from your pension.

If your pension is piurely intended as an inheritance why would you want to buy an annuity anyway?   If you dont need the money why would you want to drawdown your pension?  Just keep the money untouched in your pension.

Whilst all this is going on are you earning any money or are you living on excess retirement income - eg DB pensions.  If you are not earning from employment your annual tax free pension contributions are limited to £3600 gross, £2880 net.  THis is below the MPAA.t

dunstonh

say 10 years later, I buy an annuity with this money, does that trigger the MPAA? 

Depends on the type of annuity. Some annuities fall under the flexible definition.  A lifetime annuity would not.

 We will have surplus income, and I’m trying to work out the most tax efficient way to pass it on.

Generally, not an annuity then.

NannaH

If you buy an annuity it gives you a guaranteed income,  when you die it generally dies with you unless you’ve paid extra for a spouse’s pension.
It’s definitely not the way to pass on an inheritance.
Even an inherited Sipp is taxable after the age of 75,  at the tax rate of whoever inherits it,  so it’s only tax efficient if you die before 75.   

If you want to pass on a decent amount tax free then Life insurance written in trust ( so it falls outside your estate)  could be a way to do it.
 We have policies that will pay out £100k on death until we are 75,  we took them out at age 50 and it’s £30 a month. 

dunstonh

If you buy an annuity it gives you a guaranteed income,  when you die it generally dies with you unless you’ve paid extra for a spouse’s pension.

The pension freedoms were not just about drawdown.  The laws on annuities were changed as well and they now allowed to have other death benefits.   So, you can now see 20 or 30 years spouse pension (not just the old limit of 10 years) and lump sum benefits such as return of unused capital.

Pensions are a good estate planning tool as long as the beneficiary doesn't plan to blow it in one go if death occurs after 75.  If you have sensible beneficiaries then its not a problem.  If you have the black sheep of the family, well anything goes.

NannaH

Thanks for the clarification Dunstonh.   Is there a big difference in cost for an annuity with death benefits?  

Albermarle

Even an inherited Sipp is taxable after the age of 75,  at the tax rate of whoever inherits it,  so it’s only tax efficient if you die before 75.   

Not strictly true. By keeping assets as a pension , your estate could save on 40% IHT . Even if you die after 75 the pension beneficiary only has to pay their normal income tax rate on withdrawals. This could well be 20% or even less taking their personal allowance into account. 

 As my pension, won’t count as part of my estate for IHT purposes,

That is the current legislation, but quite possibly it might change at some point. It has been argued that some pension tax rules are too generous, and a pensions function is to provide an income in retirement , not as a way of avoiding IHT .

Personally I hope it doesn't change, but would not be shocked to see some changes in future, although a complete reversal of the rules is hopefully unlikely .

dunstonh

Thanks for the clarification Dunstonh.   Is there a big difference in cost for an annuity with death benefits?

If the guarantee ends within your life expectancy then the cost is very low.   If the guarantee goes beyond life expectancy then the cost hits harder.  On current annuity rates, enough to make drawdown more desirable for most people.

RogerPensionGuy

I'm just trying to clear up my mind and this thread is helpful.

I've just used DC SIPP crystallised funds to buy an annuity that is RPI and I had thought this would trigger the MPAA of that current 10K limit.

But a friend just casually mentioned that it doesn't.

I've dug around and I'm still not sure of my correct status, thankfully I don't think this MPAA gotcha is a concern to me, but maybe helpful to others so that's why I'm posting and asking for views.

I was surprised reading up this morning I must admit.

My RPI annuity is a lifetime and with 100% value protection for information.

This RPI annuity can actually reduce payment if deflation occurs and this is where I'm unclear on how the MPAA rules could affect.

Of interest some annuity RPI providers have a zero floor collar which means payments can never decrease, I did prefer this zero floor collar, but picking this zero floor collar was going to be a much lower payment output to me the customer, strangely last year the best RPI annuity offer did actually include the zero floor, but I elected to wait a bit and now decided to accept best output RPI without zero floor.

This thread also interestting as it talks about DC SIPPs and inheritance rules and how rules change.

Hopefully any views clarification posted here will help others.

Cheers Roger.

Secret2ndAccount

It's not accessing your pension that triggers MPAA. It's flexibly accessing it. You have converted your pot into a lifetime commitment. The payments are determined by rules, not by you. You have no option to pause payment, increase payment, or decrease payment. You have no flexibility. You have not triggered MPAA.

Now, I suppose you could argue that a 10 year fixed term annuity comes with all the same rules, yet that normally does trigger the MPAA. If they decreed that FTA does not trigger MPAA, you could take multiple 1 year FTA's and effectively get any amount of money out in short time whilst never triggering MPAA. You have to draw the line somewhere.