How do pension allowances work?

No, once you’ve started taking money out of your defined contribution pension, your Annual Allowance falls from £40,000 to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA). However, if you take a 25% tax-free lump sum out of your pension but not any income, you can still hang onto your full Annual Allowance.

Jonathan Watts-Lay, director at WEALTH at work, which provides financial education and guidance in the workplace, said: “When someone draws money from their pension beyond their tax-free cash entitlement, a money purchase annual allowance is introduced for future contributions. For most people this means an annual limit of £4,000 will apply to all future pension contributions, instead of the usual £40,000.  If contributions beyond this limit are made, a tax charge will be due. This could be particularly significant for someone who draws a pension whilst still in work and is a member of their workplace pension scheme.

“The effect of the money purchase annual allowance will typically mean that it would not be practical for an individual to repay money back into their pension once they have withdrawn it, so it could be difficult to build it back up.”

Find out more about the MPAA in our article What is the Money Purchase Annual Allowance?

Author: wpadmin

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