2. Those who have already triggered the MPAA
Anyone who has flexibly accessed benefits is potentially impacted if they are still contributing, or having contributions made on their behalf or by their employer and these exceed £4,000. A check of pension contributions against available allowances should be a part of any review process, so the reduction should be caught for those getting advice. Others will need to rely on employers/schemes informing them of the rule changes.
This will not necessarily be an issue only for high earners; relatively small salaries with good quality workplace provision could be impacted.
Some schemes will receive 18 per cent of salary between employer and employee. This would impact people on salaries from £22,223, a figure below the national average wage. Conversely, anyone only having auto-enrolment minima contributions paid will not trigger regardless of salary.
Like those who have yet to trigger their benefits the issues are the same, if they are already contributing, or looking to start, they will have to restrict them to £4,000 or pay the tax charge. Alternate savings vehicles may be needed.
Where a tax charge is payable then this will have to be declared to HMRC through self-assessment and the charge paid, it may be possible to have this collected through future PAYE coding.
Case study
Finally, it should be remembered that avoiding a MPAA charge might not be a good thing.
Let’s take Bob. He earns £40,000 a year and his employer pays 6 per cent of this into a pension. Where Bob pays up to 6 per cent too, his employer will match it.
You can see from the table below that the amount of any MPAA charge will be under Bob’s control – it will be based on how much he decides to pay.
Once the MPAA is reached:
Bob effectively receives no tax relief on each additional £1 he contributes, so;
• Each £1 of pension costs him £1;
• On withdrawals this £1, after 25 per cent tax free and 20 per cent tax, gives 85p
Ordinarily this would not be sensible.
However, while the employer is matching contributions:
• Bob’s £1 gets him 85p.
• His employers £1 costs him 20p tax,
• His employers £1 also returns 85p, so;
• Bob’s £1 generates £1.50.
So, suffering an MPAA charge makes Bob better off while his employer matches his contribution. Once the employer matching stops, the pension no longer seems worth it.
Salary | £40,000 | £40,000 | £40,000 | £40,000 | £40,000 |
Employer contribution | 6% | 8% | 10% | 12% | 12% |
Bob's contribution | 0% | 2% | 4% | 6% | 12% |
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Tax relief (Bob) | 20% | 20% | 20% | 20% | 20% |
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Employer contribution | £2,400 | £3,200 | £4,000 | £4,800 | £4,800 |
Bob's contribution | £0 | £800 | £1,600 | £2,400 | £4,800 |
Total Pension | £2,400 | £4,000 | £5,600 | £7,200 | £9,600 |
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MPAA |
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Excess | £0 | £0 | £1,600 | £3,200 | £5,600 |
Charge | £0 | £0 | £320 | £640 | £1,120 |
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Bob’s cost |
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Contribution after tax relief | £0 | £640 | £1,280 | £1,920 | £3,840 |
Tax charge | £0 | £0 | £320 | £640 | £1,120 |
A) Total | £0 | £640 | £1,600 | £2,560 | £4,960 |
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Withdrawal tax | 20% | 20% | 20% | 20% | 20% |
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B) Pension after PCLS and withdrawal tax | £2,040 | £3,400 | £4,760 | £6,120 | £8,160 |
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Return |
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£ (B-A) | £2,040 | £2,760 | £3,160 | £3,560 | £3,200 |
% | Infinite | 431% | 198% | 139% | 65% |
Once employer matching stops almost everyone could invest their money somewhere better. Other factors should be taken into account too: IHT position, other tax benefits like avoiding a child benefit charge or restoring some personal allowance or employers could be asked to change remuneration packages which could net benefits.
