Before April 2015, a limited form of pension flexibility was available and people who used this were prohibited from making further defined contribution (DC) pension contributions.

This was designed to stop people gaining a second round of tax relief by withdrawing savings and reinvesting them into their pension or diverting their salary into pension, gaining tax relief, and then immediately withdrawing 25% tax-free.

Since pensions freedoms in 2015, the £10,000 MPAA limit has been in force but this is considered to be too high by the government, as it states that ‘an individual still in work can invest up to £10,000 of their earnings, tax-free, into a pension whilst also drawing out their existing DC pension savings… acting in this way reduces an individual’s tax bill by 25% and, at the level of £10,000, this means £1,125 for an additional rate taxpayer’.

Effectively, taxpayers can take a lump sum out of their pension, and then continue paying in up to £10,000 a year into a tax-free DC pensions scheme.

The government does not consider that earners aged 55 and over should be able to enjoy double pension tax relief, such as relief on recycled pension savings, but does wish to offer scope for those who have needed to access their savings to subsequently rebuild them. The government will consult on the detail of the measures with an effective date slated for the new tax year.

Once a person has accessed pension savings flexibly, if they wish to make any further contributions to a defined contribution pension, tax-relieved contributions are restricted to a special money purchase annual allowance (MPAA).

The measure is likely to raise £360m by the end of this parliament and is set to reduce an unexpected tax loophole.

The reduced MPAA will come into effect from April 2017.

The consultation closes on 15 February 2017.

The Treasury consultation, Reducing the money purchase annual allowance is available here

Overseas pensions

The tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pension tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones.

The government will also close specialist pension schemes for those employed abroad (section 615 schemes) to new saving, extend from five to 10 years the taxing rights over recently emigrated non-UK residents’ foreign lump sum payments from funds that have had UK tax relief, align the tax treatment of funds transferred between registered pension schemes, and update the eligibility criteria for foreign schemes to qualify as overseas pensions schemes for tax purposes.