Exceeding Money Purchase Annual Allowance after cashing in small pension

EdwardtheElder

Dear readers,

Can anyone give me some advice on the following? In 2022 I cashed in a small pension with Sun Life that my father, God rest his soul, set up for me in 1991. I never paid a penny into this, and received £7200 after tax, although the taxable amount was £10,360. I spoke the last week to a really helpful chap at the Prudential about another pension and I mentioned having 'cashed in' the Sun Life pension. He told me that this triggered the MPAA limiting me to £10,000 per year contributions. I didn't know about this until then. I have paid £20,000 into PensionBee this year. What do I do next? ChatGPT (which I know is not to be trusted) mentioned contacting HMRC and PensionBee. It also mentioned being fined.

As I mentioned earlier, any help would be greatly appreciated.

Baldytyke88

Do you have any unused pension annual allowance from the previous three tax years?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81919272#Comment_81919272

That is not relevant in this situation.

If you take one penny of taxable income from a DC pension, you are limited to max contributions of £10K pa , including your contributions + tax relief + employer contributions.

Secret2ndAccount

You haven't broken the law, but you have broken the rules.

You can't ask for your money back; you have to pay the Annual Allowance Charge (the fine)

Add up all your pension contributions for the year from all sources (you, employer, tax relief). Subtract £10,000. That's how much you are over the limit. You will then pay a charge on this amount which is equal to income tax at your highest rate, so probably 20% or 40%.

It sounds really bad, but presumably you got tax relief when you paid the money in to your pension. So all it's done is to cancel out the benefit of putting the money in. Of course, you will probably pay tax on this money again when you draw it out, so it's best not to do this again…

DRS1

This may help. Well as to what to do now not with how to unravel it.

Money purchase annual allowance (MPAA) | MoneyHelper

Marcon

https://forums.moneysavingexpert.com/discussion/6659183/exceeding-money-purchase-annual-allowance-after-cashing-in-small-pension

OP can't 'unravel it' - just sort out the tax consequences.

They've received tax relief on £20,000 when they are only entitled to tax relief on £10,000. They aren't 'fined' as such, but can't keep the benefit of the tax relief (or ask for a refund of the 'overpaid' £10,000). The 'excess' £10,000 will be added to their other income for this tax year and they'll be taxed accordingly.

Useful reading: https://www.ajbell.co.uk/sites/ajbell/files/Scheme_pays_guide.pdf

EdwardtheElder

Thank you all. It is as I suspected.

westv

If only the Sun Life pension had been £360 less.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81919834#Comment_81919834

Wouldn't have helped unless OP knew to ask to use small pots regime - and Sun Life offered that option. Highly unlikely on a pension set up in 1991.