Ceri Jones helps a reader with a question about pensions.
Ceri Jones mentioned in a recent feature that if you take taxable cash from a defined contribution pension pot, you trigger a reduction in the annual allowance from £40,000 to £4,000 (the money purchase annual allowance, MPAA). Does the same apply if you start taking income from a defined benefit (DB) pot?
In a similar vein, if I make a substantial pension contribution to my Sipp (say £20,000) now, then start making withdrawals later in the same financial year, will I be in breach of the same rule whereby the annual allowance is reduced to £4,000?
David Miles, by email
Ceri Jones replies: First, the MPAA only applies to contributions to DC pensions and not DB schemes. However, individuals with DB schemes with high earnings may be caught by the tapered annual allowance (TAA) – although this threshold increased by £90,000 to £200,000 in the March Budget.
Regarding your Sipp, the MPAA was introduced precisely to stop people from repeatedly taking money out of their pension plans, benefiting from tax-free cash and then putting money back in again with tax relief. However, you could ‘game’ the system by making contributions first and taking income later in a single tax year. This is because in the first tax year that the MPAA applies, only contributions paid to DC arrangements after the date of the first trigger event are measured against the MPAA. So your £20,000 contribution in the early part of the tax year would be measured against the alternative annual allowance (£40,000 less the MPAA), while any contributions paid after the trigger date would be measured against the MPAA. Thereafter, of course, the returned to you, the beneficial client.
With respect to your investments, these too will be segregated from your investment platform’s own assets. For UK assets, the platform will generally effect appropriate registration of legal title in the name of a nominee company which is controlled by the platform. These assets are protected from the firm’s creditors, and will be returned to the underlying clients in the event of the firm’s failure. This applies whether you hold direct shares, funds, investment trusts or ETFs.
Differing legal regimes exist overseas, which means non-UK assets may not be registered in the name of the platform’s nominee company and may therefore be subject to different treatment in the event of the platform’s failure.
If you need help with a tax, pension or financial planning problem, please email: email@example.com