MPAA? LTA? Tapered Annual Allowance? Let’s jargon bust Pension Allowances



Posted on: 13th August 2019

The world of finance and pensions is filled with jargon and the terminology can be hard to understand even for the most hardened financiers. So, grab a cuppa and let’s clear the jargon mist. 

The most common one you have probably heard of is the Lifetime Allowance. This is the ultimate limit to the amount of pension you can draw without incurring any additional tax charges. It covers any lump sums, such as your Tax-free cash or one-off payments, or any income you receive. 

The limit in the 2019/2020 tax year is £1,055,000 and is currently set to increase in line with inflation at the start of each tax year. 

The Lifetime allowance has been higher in the past. Its previous level was £1,250,000 before it was reduced in April 2016. Those who had or were likely to meet or surpass this level could apply for protection to keep this level of allowance providing they make no further contributions to any pension. This also applies to the lifetime allowance reductions in 2012 and 2014.

The Annual Allowance is the limit of total contributions that can be made into a pension within each tax year and still be eligible for tax relief. The current limit is £40,000. This allowance is applied to any contributions to your personal or workplace pensions and any increase in defined benefit (or Final Salary) entitlement. 

However, if you have not used your total £40,000 limit from the previous three tax years, it is possible to carry forward the unused allowances and contribute more then £40,000 in one year. More information on carry forward can be found here.

The Annual Allowance can be reduced if you earn over £150,000 or you have flexibly accessed your pensions.

I will tackle the high-income reduction first: The Tapered Annual Allowance is a reduction in the annual allowance for those who earn over £150,000. 

Simply – for every £2 earnt over £150,000, the annual allowance is reduced by £1 to a minimum level of £10,000.

Therefore, if your ‘adjusted income’ is over £210,000, your annual allowance will be £10,000. If you believe you may fall into this high-income bracket – head to the Gov website for some guidance or alternatively, get in touch! 

Since April 2016 when Pension Freedoms were introduced, you have been able to access your defined contribution/money purchase pensions anytime from the age of 55. Once you take a pound from any of these pensions, you become subject to the Money Purchase Annual Allowance which currently set at £4,000 and works in the same way as the standard annual allowance.

The Government set it at this level to stop recycling – where you take potentially tax-advantaged funds from your pension and recycle them back into your pension to reclaim tax relief. However, there have been some calls by pension providers to increase the limit to £10,000 to avoid the public inadvertently breaching this allowance and incurring a tax charge whilst they are working and accessing their pensions. 

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