The money purchase annual allowance (MPAA) will be reduced from £10,000 to £4,000 in April 2017, chancellor Philip Hammond announced as part of Autumn Statement 2016.
In his speech to the House of Commons, the chancellor said that the reason for the reduction was to “prevent inappropriate double tax relief”.
The MPAA is a reduction in the annual allowance for individuals who have begun flexibly accessing their pension pot. This means that a person will receive tax relief on a smaller percentage of any pension contributions made.
The MPAA was introduced in 2015 in order to prevent people receiving tax relief on contributions, withdrawing the money and then adding it back to their pension to receive more relief.
Kate Smith, head of pensions at Aegon, said:
“If you are retiring in the traditional sense and giving up work completely to the live on your savings this charge is unlikely to affect you. However, if you’re accessing your pension at an early age, from 55 under the pension freedoms, perhaps to pay off a debt, then the reduction could create a problem.
“Taking your savings in a particular order can make a big difference to how much tax you’ll pay and how much can be paid into your pension, making your savings last longer. “
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