Block on Pensions Recycling
Since 6 April 2015, there are few restrictions for those aged 55 and over who wish to access their savings in money purchase pension schemes. You may have taken advantage of this 'pension freedom' as it is called. However, if you have drawn more than the tax-free lump sum from your pension fund, you need to think carefully about making further pension contributions.
The total amount you and your employer can contribute each year to a pension fund in your name is limited by your Annual Allowance (AA). This is set at £40,000 per year, plus any unused AA brought forward from the three previous years.
Once you have taken taxable income from your pension fund, your AA is replaced by a Money Purchase Annual Allowance (MPAA) for that tax year and all subsequent tax years. The MPAA is currently set at £10,000, but it will reduce to £4,000 on 6 April 2017. It can’t be boosted by unused allowance or carried forward to later tax years. If your pension contributions exceed your AA or MPAA (where that applies), you must pay tax on those excess contributions at your highest tax rate.
The purpose of the MPAA is to discourage people from drawing funds from one pension scheme, then replacing that money in another pension scheme, attracting additional tax relief. This is called 'pensions recycling'. The low level of the MPAA may catch you out if you are still employed and contributing to an occupational pension scheme under auto-enrolment. Take professional advice before accessing any of your pension savings.