High earners are facing major pensions headache

apply if you have already started drawing a pension.

This was workable for the vast majority. Most people who had accessed some of their pension fund were unlikely to be contributing more that £10,000 into pensions.

Then, the Chancellor announced at the last Budget that the MPAA was being reduced to £4,000 from April 6 this year, a move subsequently shelved due to the General Election.

The change was meant to stop people unfairly benefiting from “recycling” their pension savings – withdrawing cash from their pots and then claiming tax relief on new contributions.

It was equally intended to counter an individual using the flexibilities around accessing a money purchase pension arrangement as means to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25 per cent tax-free.

The Government argued that the new limit would be “fair and reasonable” and should allow individuals to access their pension savings to rebuild them if they subsequently have an opportunity to do so.

And it is intent on reintroducing the measure – the next Budget is on November 22 – which will apply retrospectively for 2017/18.

Mel Stride, the financial secretary to the Treasury, cautioned: “Those affected by the provisions should continue to assume that they will apply as originally announced.”

This means that those who have triggered the MPAA and pay more than £4,000 into pensions in 2017/18 will face a charge. For somebody earning £40,000, if the total of personal and employer pension contributions exceeds ten per cent of their salary, they’ll break the MPAA.

Yet many people may well be unaware that they are likely to fall foul.

It’s more complex for those who are members of defined benefit schemes but potentially an even greater challenge.

If you exceed the MPAA, the amounts you pay into your pension will be taxed at your highest marginal rate – 20 per cent, 40 per cent or 45 per cent depending on your earnings.

In addition to all this, a tapered annual allowance was introduced last year for high earners.

For every £2 of income above £150,000 per annum, £1 of annual allowance is lost. The maximum reduction is £30,000, meaning that anyone earning over £210,000 will have their annual allowance capped at £10,000.

Worse still, recent HM Revenue & Customs’ guidance could mean that individuals who expect their pension scheme to pay any excess charge may find that they have to pay it themselves.

Currently savers can ask their retirement scheme to deal with any tax charges related to an annual allowance breach directly from their pension fund, through a “scheme pays” facility. But that may not apply in future. Top-rate earners who breach their tapered annual allowance risk a maximum bill of £13,500, it is suggested.

Like so much else, it’s all extremely complicated and far removed from Government pledges to make such matters straightforward to understand, but something we have to live with.

Best then to take advice from your adviser so as to ensure you do not find yourself in contravention of the rules. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed

as financial advice