Ask Money: a cusp of retirement query
Ceri Jones helps a reader with a question about pensions.
29th May 2020 15:02
Ceri Jones helps a reader with a question about pensions.
Ceri Jones mentioned in a recent feature that if you take taxable cash from a defined contribution pension pot, you trigger a reduction in the annual allowance from £40,000 to £4,000 (the money purchase annual allowance, MPAA). Does the same apply if you start taking income from a defined benefit (DB) pot?
In a similar vein, if I make a substantial pension contribution to my Sipp (say £20,000) now, then start making withdrawals later in the same financial year, will I be in breach of the same rule whereby the annual allowance is reduced to £4,000?David Miles, by email
Ceri Jones replies: First, the MPAA only applies to contributions to DC pensions and not DB schemes. However, individuals with DB schemes with high earnings may be caught by the tapered annual allowance (TAA) – although this threshold increased by £90,000 to £200,000 in the March Budget.
Regarding your Sipp, the MPAA was introduced precisely to stop people from repeatedly taking money out of their pension plans, benefiting from tax-free cash and then putting money back in again with tax relief. However, you could ‘game’ the system by making contributions first and taking income later in a single tax year. This is because in the first tax year that the MPAA applies, only contributions paid to DC arrangements after the date of the first trigger event are measured against the MPAA. So your £20,000 contribution in the early part of the tax year would be measured against the alternative annual allowance (£40,000 less the MPAA), while any contributions paid after the trigger date would be measured against the MPAA. Thereafter, of course, the returned to you, the beneficial client.
With respect to your investments, these too will be segregated from your investment platform’s own assets. For UK assets, the platform will generally effect appropriate registration of legal title in the name of a nominee company which is controlled by the platform. These assets are protected from the firm’s creditors, and will be returned to the underlying clients in the event of the firm’s failure. This applies whether you hold direct shares, funds, investment trusts or ETFs.
Differing legal regimes exist overseas, which means non-UK assets may not be registered in the name of the platform’s nominee company and may therefore be subject to different treatment in the event of the platform’s failure.
If you need help with a tax, pension or financial planning problem, please email: moneyobserver.ed@moneyobserver.com
Read more:Â
-Â What does coronavirus mean for your retirement plans?
- 11 dos and don’ts in pension planning
-Â Ask Money: would my small pension pot ideas work?
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.