Pension Annual Allowance (AA)
The pensions annual allowance is the maximum amount that both you and your employer can pay into a pension fund each year. This is capped with effect from 6 April 2023 at £60,000 pa or your earnings.
- If you earn £40,000 pa, the maximum you can pay into a pension scheme each year is £40,000 pa.
- If you earn £80,000 pa, the maximum you can now pay into a pension scheme each year is £60,000 pa. You cannot pay in more than you earn, although your employer may do so under strict rules if your employment position and duties are commensurate with this if you have some unused carry forward pension tax relief from the previous 3 years.
Flexible Drawdown for pension funds over £10,000
- If you decide to drawdown some or all your pension fund under flexible rules, 25% is a tax-free lump sum and the remaining 75% is taxable.
- If you only withdraw the 25% tax free lump sum and do not touch the 75% taxable amount, you keep your full pension annual allowance up to £40,000pa.
- If you withdraw the 25% tax free lump sum and then also draw some of the 75% taxable element, even if that is just £1, the pension annual allowance is reduced to a maximum level. This is called the Money Purchase Annual Allowance (MPAA).
- The MPAA i.e., the maximum you and your employer can now pay into pension funds each year (if you have already taken taxable pension element under flexible drawdown) was £4,000 pa but this has been increased from 6 April 2023 to £10,000 pa.
The increase in MPAA is designed to get more people to stay in work rather than retire and/or to return to work even if they have accessed some of the taxable element of any investment linked pension pot for early retirement or perhaps to get through the current inflation and cost of living increases.
Plan Pension Fund Withdrawals
Given the above, it is worth considering what your work position is, whether you are likely to need to pay more than £10,000 pa into a pension in the future before drawing down any taxable element of your investment linked pensions. Depending upon the route that you take or the size of the funds that you have, this may affect how and when you decide to draw down pension funds.
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