Is now the right time to access your DC pension pot?
Pension Freedoms were introduced in April 2015 which gave members of Defined Contribution (DC) pension scheme plans much more flexibility in how they can access their pension pot.
Since April 2016, the maximum tax relievable contribution that can be paid into a pension scheme is 100% of relevant UK earnings, subject to a cap of £40,000 per year (2020/21). However, individuals who have accessed their pension using the new freedoms introduced in April 2015 are potentially subject to different contribution constraints. The maximum tax relievable contribution is reduced to £4,000 (2020/21). This is called the Money Purchase Annual Allowance (MPAA). MPAA triggers include:
- Uncrystallised Funds Pension Lump Sum (UFPLS) (otherwise known as ‘cashing out’ your pension)
- Flexi-Access Drawdown Income
- Capped Drawdown Income exceeding the maximum GAD limit
- Flexible Annuity
Accesing your tax free cash (normally 25% of your fund), will NOT trigger the MPAA.
Covid-19 has left many people in a difficult situation financially – with potential cash flow issues, is accessing your pension pot now a good idea? Or could accessing your pension pot now actually have a negative impact on your future finances?
The answer to these questions will of course depend on personal circumstances. If you have limited cash savings and require funds, accessing your pension pot may be your only option. However, if you have cash savings which you can deplete before accessing your pension, this may be in your best interest, especially if you intend to make pension contributions in future years.
Remember, when making a pension contribution, you will get tax relief up to your highest marginal rate which is effectively free money. By accessing your pension flexibly, you limit the annual tax relievable contribution that you can make to £4,000.
There are options available to you which will not trigger the MPAA:
- Drawing your tax free cash only (i.e with no additional income withdrawal).
- Small pots payments – if you have a pension pot worth £10,000 or less, legislation allows you to take this as a lump sum (25% is usually paid tax-free with the remainder taxed at your marginal rate of income tax).
The MPAA only applies to contributions made to or withdrawals made from Defined Contribution schemes and does not apply to Defined Benefit schemes.
There have been calls by some industry experts to abolish or relax the MPAA due to the Covid-19 outbreak. However, as we stand, the MPAA remains in place at £4,000.
The rules can be complex, and the sensible starting point if you are considering accessing any of your pensions is to seek guidance and advice from a professional financial adviser before you take any action. Please see our pension administration services for more information.
More information regarding the MPAA can be found on the following links:
https://www.gov.uk/guidance/work-out-your-allowances-if-youve-flexibly-accessed-your-pension
https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions
