Alternative Annual Allowance

Alternative Annual Allowance

Are you using your ‘alternative annual allowance’ in retirement?

When you initially take your pension, you trigger something called your money purchase annual allowance (MPAA). This limits further contributions to your defined contribution or SIPP pension to just £4,000. It is designed to prevent taking income from your pension and then making new contributions with it to claim further income tax relief, this is also known as churning.

However, these limitations do not apply to defined benefit schemes. In these, benefits can continue to be accrued even after the MPAA has been triggered.

This is referred to as your ‘alternative annual allowance’.

How to gain an ‘alternative annual allowance’

If you own your own company and have a defined benefit SSAS (that is small self-administered scheme that operates under ‘defined benefit’ rules), it is therefore possible for you to continue to contribute a much higher amount than the MPAA limit of £4,000 a year.

Let’s take a look at an example:

Mr James crystallised his pension three years ago by taking some retirement benefits. But he has been contributing the maximum £4,000 a year to his pension since.

He has unexpectedly taken on more lucrative consultancy work and wants to build up an extra pot for the future as tax efficiently as possible. He now creates a DB SSAS, and under HMRC pension rules has the ability to use his ‘alternative annual allowance’ which amounts to £36,000 per tax year. Pension carry forward can be applied for the previous three years. This amounts to £108,000 that can be paid from Mr James’s limited company into his pension with full tax relief, even though he is usually restricted by the MPAA.

This method is ideal for business owners who have taken their pension but have then continued to work.

Alternative Annual Allowance

What is a defined benefit SSAS?

So, what is a defined benefit SSAS?

This is a unique kind of pension scheme that is owned by a limited company, also referred to as the ‘sponsor’. The company runs the scheme for the benefit of its members, all of which are decided by the directors of the company.

Defined benefit schemes are usually reserved for larger corporations. However, smaller companies can now benefit from them too and use exactly the same rules. All schemes are registered with HMRC and receive direct approval before being created.

Download your free DB SSAS guide

For more information on defined benefit SSAS pensions and how they can help you, download our complimentary DB SSAS guide for free.

You may like

People who read this also read

Questions? We'll Put You On The Right Path!

With over 35 years of experience, our team will be able to provide you with the guidance you need to make the right decisions.