Pension Annual Allowance Changes

The plans of many middle-aged savers may have been affected by the closure of a loophole that had previously allowed flexibility in pension planning.

In one of the few announcements on pensions in the Autumn 2016 Statement the Chancellor unveiled a proposal that drastically cuts the amount that savers can invest in a pension once they have already made a taxable withdrawal from their pension pot.

Currently taking a taxable payment lowers the annual allowance –the amount you can save into a pension in a year – from £40,000 to £10,000.  This reduced allowance was introduced along with the freedoms to prevent abuse, or recycling, by which the savers might be tempted to draw money out of their pension only to reinvest it with the objective of obtaining extra tax relief.

The Government will now reduce the allowance further, from £10,000 to just £4,000 from April 2017. The move is intended close the loophole and stamp out inappropriate double tax relief.

The main group at risk from the Chancellor’s announcement are those who have taken advantage of the pension freedoms, a series of reforms introduced in April 2015, that mean anyone who is over 55 and has a ”defined contribution” pension has a greater control over how to spend their savings.

Taking just your tax-free cash entitlement will preserve the normal £40,000 allowance. Once you take more, and tax is due, the reduced allowance is triggered.  If your pension provider or scheme allows it, the “small pots rule” can help. This allows you to take, as cash, up to three personal pensions less than £10,000 each. It requires each pot to be separate and some firms may struggle to administer this.