Changes to pension tax allowances

As part of the April 2015 pension rule changes, the Government has introduced a new annual allowance that applies to people who start taking out their pension savings from age 55, but who wish to continue saving into a pension scheme.

Once you make a withdrawal from your drawdown fund (over and above your 25% tax-free lump sum) or take a lump sum payment, this triggers the reduction in your annual allowance from £40,000, currently, to £10,000. The £10,000 limit is known as the ‘money purchase annual allowance’ (MPAA). This means you will only receive tax relief on money purchase pension savings up to £10,000 a year.

You should consider speaking to an independent financial adviser about the implications of taking money out of your pension while you are still contributing into it.

The Government has also proposed reducing the lifetime allowance from £1.25 million to £1 million, from 2016. The lifetime allowance is a HMRC allowance that applies to the total tax-free pension savings you can have from all sources (except the State). If your total pension savings are over the lifetime allowance at the time you retire, you will have to pay tax on the value of the savings over the allowance.