MPAA increase implications

concernedpharmacist

Hi,

I note that MPAA is being raised from £4k to £10k.

I wonder if the proposal below is acceptable/legal/sensible?

I am 61 years old.

I am currently drawing £21k p.a. from a DB pension and am earning about £20k p.a. through self employment.
This just about covers my living costs, but can afford no more than £2k p.a.  contributions to my DC  pension.

My DC pension is currently worth £150k, that I have not yet accessed.

Can I/should I take the 25% tax free amount from this, or perhaps drawdown a bit more, and then use this to put £10k p.a. back into a new Personal pension scheme therefore gaining tax relief?

Is this what is termed recycling? And is it legal/permissable?

Appreciate advice.

Thanks 

Jeremy535897

If you have not drawn down your DC pension, why does the MPAA apply to you? Even if it did, there is nothing to stop you doing what you propose. If it does not apply to you, you could draw all your tax free lump sum and put it back into your DC pension, but for all practical purposes you would limit the contribution to the relevant earnings from your self employment. There would be no point in drawing more and falling into MPAA.

concernedpharmacist

My understanding was that by drawing down the DC pension then MPAA would be activated. 
Then I would be restricted to tax relief on £10k (previously just £4k) on any future year's pension contributions.

But are you saying that I can take the tax free lump sum (£37.5k) without such restriction? And MPAA will only apply if I take any in excess of this lump sum?

Without drawing anything down I would be restricted to tax relief on my relevant earnings (£20k), but can't afford more than £2k.

With the tax-free lump sum (or further drawdown),  I could increase this to £8k for the next 6 years getting tax-relief on the full amount until my state pension arrives? But by reinvesting the drawdown wouldn't this mean that I had tax relief twice on the same money?
If so, then is HMRC happy with this and why doesn't everyone approaching retirement consider this?

Albermarle

My understanding was that by drawing down the DC pension then MPAA would be activated. 
Then I would be restricted to tax relief on £10k (previously just £4k) on any future year's pension contributions.

MPAA is not connected to how much tax relief you can get. It is a limit on the total amount that can be added to a pension in a tax year ( so would include any employer contributions for example). The amount of tax relief you can get is determined by your gross earnings .

But are you saying that I can take the tax free lump sum (£37.5k) without such restriction? And MPAA will only apply if I take any in excess of this lump sum?

MPAA only kicks in if you take any of the 75% taxable income from the pension.

 But by reinvesting the drawdown wouldn't this mean that I had tax relief twice on the same money?

Yes, which is why there are recycling rules in place to prevent this happening on a large scale. However if you stick within the rules and keep it small scale then you should be OK .

f so, then is HMRC happy with this and why doesn't everyone approaching retirement consider this?

Everybody's personal situation is different - plus the majority of people do not understand pensions or tax relief. If you stopped most people in the street and asked them what MPAA was, you would just get a blank stare.

Jeremy535897

This article explains it quite well:
https://www.investorschronicle.co.uk/pensions/2023/03/21/how-to-avoid-triggering-the-money-purchase-annual-allowance/

It does seem odd that you can get tax relief on reinvesting a lump sum tax free, but so long as you don't take a penny of taxable income out of the DC pension fund, that is what the law provides. Now that the MPAA has been raised to £10,000, on the numbers you are talking about, it wouldn't matter anyway. The government's priority seems to be to encourage older people back to work, and it was perceived that one of the discouraging factors was the restriction of future allowable pension contributions to £4,000 a year (which was itself a relatively recent reduction from the more generous original MPAA of, you've guessed it, £10,000).

There are fully retired people who have accessed their DC pensions who routinely invest £3,600 gross into them each tax year (which you can do even if you have no earnings at all), then take £900 as a cash lump sum straight away and the rest as pension. They pay in £2,880 net, the government adds £720, they take out £900 tax free and £2,700 less 20% tax, so they get £3,060 for their £2,880 investment. (I don't see the point of this as I would have thought the fees would outweigh the benefit.)

Albermarle

They pay in £2,880 net, the government adds £720, they take out £900 tax free and £2,700 less 20% tax, so they get £3,060 for their £2,880 investment. (I don't see the point of this as I would have thought the fees would outweigh the benefit.)

Regarding the fees it is a matter of picking the right provider. You need an investment platform that charges a % of your money and has no minimum charge and no charge for withdrawals.

For example - Hargreaves Lansdown and Vanguard . Platform fees can be as low as £5 for these small amounts.

Then if you keep it in cash, there will be no investment fund fees. The main possible drawback is that too much tax is taken and you have to claim it back.

Although for rich pensioners, or those who just are averse to dealing with pensions, HMRC etc, it can seem like too much bother for £180. More interesting if you can draw it out under the personal allowance of course.