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Older divorcees could be affected by Autumn Statement pension changes

Money Purchase Annual Allowance to be cut to £4,000 per year

Divorcees could be affected by proposals announced by the Chancellor of the Exchequer in his Autumn Statement that the Money Purchase Annual Allowance (MPAA) will be cut from £10,000 pa to £4,000 pa. The reduction is intended to come into force from April 2017.

David Salter, Consultant with Mills & Reeve LLP, commented:

"The whole purpose of the MPAA was to restrict the ability to recycle income into a new pension arrangement (following the introduction of the pension freedoms on 6 April 2015) so as to be able to take a further tax-free lump sum.  The MPAA is triggered when someone uses flexi-access drawdown or takes an uncrystallised funds pension lump sum (UFPLS). 

"In a divorce context, it does mean that anyone considering using either flexi-access drawdown or a UFPLS to fund a divorce settlement needs to think long and hard not only about the tax consequences of doing so but also now about their very restricted ability to rebuild a pension.  It needs also to be borne in mind that it is not possible to carry forward the MPAA for three years as is the case with the standard annual allowance.  All of this said, the annual allowance is not reduced where an individual only takes a tax-free lump sum of up to 25% of the pension fund or where he/she takes a secure income, such as purchasing an annuity (other than a short-term annuity).  Anyone who has no option but to take either flexi-access drawdown or a UFPLS to fund a divorce settlement, but who still needs to build up a retirement fund, will need also to look to an alternative vehicle.

"In the interim a person who is already affected by the MPAA should consider making the maximum contribution of £10,000 before April 2017. Of course, it is still possible to make contributions of up to £10,000 pa (£4,000 pa from April 2017) into a money purchase arrangement and contribute the balance of the annual allowance of £40,000 into a defined benefit scheme."