Private pensions update – flexible drawdown and the MPAA
From 6th April 2015, flexible drawdown became an option for money purchase pension funds, regardless of whether or not you already have a certain amount of guaranteed pension income (prior to this date you need to have certain levels of guaranteed income to fully withdraw money purchase pension funds). Flexible drawdown allows you to draw up to 100% of your private pension fund at any time.
There is still a limit of a maximum of 25% of the fund as a tax-free lump sum – the balance will be subject to income tax at your highest marginal rate. In order to avoid tripping into higher rates of income tax, consideration can be given to withdrawing the fund over a number of tax years, depending on your other taxable income.
For those with private pensions in addition to NHS scheme benefits, there may be timing issues to consider in terms of the best order in which to draw on pension funds – this can be a particularly crucial decision for those with higher NHS funds – particularly where funds are near or over the lifetime allowance and in some other situations.
A further point to bear in mind is the ‘money purchase annual allowance’ (MPAA) if you are likely to continue accruing pension benefits after accessing flexible drawdown. This is a recent introduction, to coincide with the new flexible drawdown rules, designed to restrict the recycling of tax-free lump sums back into pension savings. In essence, once you have accessed flexible drawdown, you have a restricted money purchase annual allowance of £10,000 per pension input period. The carry forward rules cannot be used to enhance the MPAA.
The new MPAA rules have several triggers. The main trigger for new arrangements from 6th April 2015 is when income is drawn from the arrangement, so it remains possible to draw your tax-free lump sum and defer taking income without triggering the MPAA restriction. Where the MPAA is triggered, note that this applies only to the ongoing funding of money purchase arrangements. However, there is a collateral impact on ongoing benefit accrual in the NHS pension scheme for active members. Where the MPAA applies, you will still be entitled to accrue between £30,000 and £40,000 of capitalised benefits each input period in defined benefits arrangements such as the NHS pension scheme. Your defined benefit accrual entitlement will be £40,000 less any contributions to money purchase schemes, subject to a maximum deduction of £10,000. Your defined benefit annual allowance can still take advantage of carry forward rules, unlike the MPAA.
There is already significant press speculation on the dangers of withdrawing and spending all of your private pensions using flexible drawdown. For those with relatively small pension funds, this may leave them with without any ongoing source of income to fund their retirement years. We expect that for most members of the NHS scheme with additional private pension provision, this should be much less of a concern.
To learn more on the topic, please contact 01772 821 021.