My wife is a retired teacher still saving into a private pot, will she be hit by new 'pension recycling' tax trick limit? Steve Webb explains
My wife is a recently retired schoolteacher and now receives her teacher's pension. She also has a private pension that she has been contributing to for many years.
She is still contributing to this private pension (less than £10,000) and has not drawn any pension from it to date.
Will she be affected by the Chancellor's Autumn Statement with regards to the proposed contributions limit of £4,000 a year to this private pension as she is now drawing upon her teachers pension?
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Savings help: Retired teacher is drawing her work pension but still saving into a private pot
Steve Webb replies: The short answer is that the changes announced by the Chancellor should not affect your wife, but they will affect some others who want to do some serious saving into a pension later in life.
If I explain the current rules and how they are going to change, I hope it will be clearer why your wife will not be affected by the decision to draw her defined benefit pension.
There is one caveat, which arises if she is no longer earning, which I will also explain below
When the former Chancellor stood up in the March 2014 Budget and announced people would have new freedoms with regard to their pensions, this was widely welcomed.
Instead of having to use the pension pot that they had built up to buy an income for life or ‘annuity’ they could go on investing it or draw some or all of it out as cash.
The one drawback with this was that people might abuse the system.
Because money that is put in to a pension attracts tax relief, and because you can generally get a quarter of the money out of your pension tax free, there was a chance that people would cycle money in and out of pensions and get ‘free money’ from the Government.
The risk was that they would put money in with the help of tax relief, immediately take a quarter out tax free, put the rest back in again with more tax relief, take another quarter out tax free and so forth, costing the taxpayer money every time.
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To try to prevent this sort of abuse, the Chancellor introduced something called the Money Purchase Annual Allowance (MPAA).
Under these rules, instead of being able to put up to £40,000 per year into a pension (which would be the normal limit), people who used the new freedoms to draw taxable cash out of their pension would thereafter only be allowed to contribute £10,000 per year.
Although this doesn’t completely stop people from cycling money through their pension in the way described above, it does mean there is a penalty if you do so, because it significantly reduces the amount you can save in future years.
The important point to bear in mind however is that this fall in the Annual Allowance is only triggered when you take money out of ‘pot of money’ pension (known more formally as a ‘Defined Contribution’ pension).
There are more details on the gov.uk website here but basically it is only ‘flexible access’ to your pension cash which triggers the lower annual allowance.
In your wife’s case, although she is drawing a teacher’s pension, this is a salary-related pension which she is accessing in the normal way, unaffected by the new pension freedoms, and so does not come within the scope of the new rules.
As you say in your question, in the November Autumn Statement the Chancellor indicated that he was consulting on whether to reduce the £10,000 Annual Allowance still further, to £4,000, with effect from 6th April 2017.
The consultation on this proposal has not yet concluded, but it seems reasonable to expect that the change will go ahead.
His announcement caught most people by surprise and suggests that there may be more people still ‘cycling’ money in and out of their Defined Contribution pensions than expected.
But to reiterate, even if this change goes ahead, it would not be triggered in your wife’s case by receipt of a salary-related teacher’s pension.
The one caveat is that aside from the rules about the Money Purchase Annual Allowance, there is another limit on how much you can contribute each year to a pension.
In general, the most you can contribute is £3,600 or 100 per cent of your earnings. If your wife now has no earnings or earnings of less than £3,600 then she would only be able to save £3,600 into a pension.
This is not connected to her decision to start drawing a teacher’s pension but does come into play if she no longer has any earnings from any source.
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