Maximum income withdrawal from Pension funds (drawdown) is determined by HMRC Government Actuarial Department and, as we all know, use a factor based on age and 15 year Gilt Rates. The Gilt yield figure was two per cent throughout 2016, and is now just 1.75%.
When first published in 1998 the rate was six per cent – a rate never achieved since.
This fact is really a reflection of low inflation and the credit crunch compression. And one other side effect of the crunch and low yields the savings rates. According to Office for National Statistics the UK taxpayer is now saving less than at any time in at least 50 years. A mere 1.7% of income was left unspent in the first quarter of 2017. The ONS say that this is the lowest savings ratio since records began in 1963. The average during this period has been a healthy 9.2% of disposable income.
The ONS in a roundabout way blame tax. They say that taxes go up, income therefore comes down but spending hasn’t slowed. The gap between the two is saving. IFAC compliance gives you pension expertise back up
The money purchase annual allowance MPAA rules prevent savers from recycling earnings in and out of a pension to catch the TFC. Clearly the determined can divert salary into their pension with tax relief, and then immediately withdraw 25% tax-free.
The money purchase annual allowance restricts contributions this way, and the maximum allowable is now just £4,000, down from £10,000 before 6 April 2017. And before you ask, there is no carry forward between tax years for the money purchase annual allowance.
The rules apply to anyone who takes a pension in any other format than an annuity.
However the MPAA will not be triggered by
- A pension commencement lump sum;
- A trivial commutation lump sum;
- A small pots triviality lump sum;
A level or increasing annuity pension