The Money Purchase Annual Allowance

The Money Purchase Annual Allowance (MPAA) came into effect on 6th April 2015 as part of Pension Freedoms and was designed to discourage people from gaining a tax advantage by taking pension withdrawals and paying these back into their pension.

What is the Money Purchase Annual Allowance?

The MPAA is a restriction on the amount of money a person can contribute to their pension once they have flexibly accessed their pension benefits. It applies to Money Purchase pensions and currently stands at £4,000.

The MPAA can apply in a variety of circumstances.

When Does the Money Purchase Annual Allowance Apply?

For most people, the MPAA will apply when they:

Take an Uncrystallised Funds Pension Lump Sum (UFPLS).
Take an income from their Flexi-access Drawdown arrangement.

There are a few other circumstances where the MPAA can apply although these are less likely:

When income is taken from a Capped Drawdown arrangement that is above the maximum GAD level.
Having a Flexible Drawdown fund immediately before 6th April 2015.
Taking a stand alone lump sum from a Money Purchase arrangement where the person has Primary Protection and a Protected Tax Free Lump Sum of greater than £375,000 as at 5th April 2006.
Becoming entitled to an Annuity on or after 6th April 2015 where the terms of the contract allow actual or potential decreases in the amount of the annuity payment other than in prescribed circumstances.
A payment of one of the benefits listed above from an overseas pension scheme that has benefitted from UK tax relief.

It is probably better to keep in mind the circumstances when the MPAA won’t apply.

When Will the MPAA Not Apply?

There a number of circumstances when the MPAA will not apply. The three most common ones are:

Receiving a Scheme Pension from a Defined Benefits Scheme.
Taking income from a Capped Drawdown arrangement as long as it is within GAD limits.
Taking a tax free lump sum and:

i) Buying a Lifetime Annuity.

ii) Moving into a Flexi-access Drawdown arrangement and taking no income.

Again, there are some less common circumstances when the MPAA won’t apply:

Taking a small pots lump sum.
Taking an income from a beneficiary’s Flexi-access Drawdown arrangement.
Where the whole fund is made up of a disqualifying pension credit i.e. where the pension credit in relation to a Pension Sharing Order comes from benefits already in payment.

What About Defined Benefit Schemes?

Although the MPAA won’t apply when a Scheme Pension is received from a Defined Benefit Scheme, being subject to the MPAA can affect how much can be accrued within a Defined Benefit Scheme.

In this case, an Alternative Annual Allowance will apply which will be £36,000 i.e. the full Annual Allowance of £40,000 less the MPAA of £4,000.

It gets even more complicated when the Tapered Annual Allowance also applies! In this case the Alternative Annual Allowance could be reduced to nil if the Tapered Annual Allowance is £4,000.

It would be sensible to check whether any unused Alternative Annual Allowance could be carried forward from the previous three tax years.

The Trigger Date

The Trigger Date is the date immediately before benefits have been flexibly accessed and there are some information requirements that then have to be met.

The pension provider has to notify the individual of the Trigger Date and the implications of this within 31 days.
The individual then has 91 days to pass this information to all schemes that they are paying contributions into.

Why is the Trigger Date Important?

In the first tax year that the MPAA applies, only those contributions paid after the Trigger Date will be subject to the MPAA.

Contributions paid before the Trigger Date will be measured against the Alternative Annual Allowance i.e. £40,000 less the MPAA of £4,000 = £36,000.

What About Carry Forward?

It is not possible to use Carry Forward to justify contributions above the MPAA for Money Purchase Schemes. It is possible to use Carry Forward to justify pension contributions above the Alternative Annual Allowance in respect of Defined Benefit accrual.

What are the Consequences of Exceeding the MPAA?

Contributions that exceed the MPAA will be subject to the Annual Allowance Charge.

Summary

The MPAA can get pretty complicated and can catch out many people, in particular older workers, who have taken some of their pension benefits but who have then returned to the workforce and have joined a Workplace Pension.

Contact Us

We are always happy to help with any pension queries and please do let us know if you would like any help with your pensions.