What is the Money Purchase Annual Allowance ?

What is the Money Purchase Annual Allowance (MPAA) ?

Quite simply, if you start drawing an income from a Defined Contribution (DC) pension in a flexible manner. The amount that you can contribute in future might be reduced or restricted.

This is known as the Money Purchase Annual Allowance or MPAA in simplified terms.

What are the current allowances ? 

At present, somebody can contribute £ 60,000 per annum into a UK pension scheme and receive tax-relief during each tax year. This will include any amount from their employer.

Or it could be a lower amount, is you are earning a lower salary. So if you are earning £ 30K you can contribute up to lower amount of salary.

However through, when you are seen to be drawing a flexible income, this amount will then be restricted to £ 10,000 per annum for the tax year. In the year that you 1st that trigger, along with all future tax years unless the rules change.

In previous years it was set at a lower amount of £ 4,000 per  tax year. This was then increased with effect from 6th April 2023.

So what triggers the MPAA ?

It will only be triggered when you draw finds from a defined contributions pension scheme. Not when you are accessing a defined benefits pension scheme.

The main triggers include:

• If you take the complete pot as a lump sum and it is over £ 10K, so not a small pots pension.
• If you access a flexible income via Flexi-access drawdown.
• Once you buy a index-linked annuity or fixed term annuity.
• Or you had a pre-April 2015 capped drawdown pot, and your income payments exceed the cap.
• By accessing income via a number of lump sums such as UFPLS (Uncrystallised Funds Pension Lump Sums)

So what events don’t trigger the MPAA ? 

• cashing a complete pot under the small pots rule.
• taking a  tax-free lump sum only via Flexi-access drawdown, but you don’t take any further income.
• buying a lifetime annuity that provides income for life, on a level or increasing basis.

Will it affect my current scheme ?

Yes, your current contributions will be affected as stated above, moving forwards.

This only may be applicable if you are earning a large salary. or you are making sizeable contributions to that current scheme.

Before you do access any old Dc pensions, if make be worthwhile checking current level of contributions in your present scheme.

By accessing old pension, you could unknowingly restrict sizeable contributions into a current scheme.

For most people it’s not an issue it simply a admin procedure.

If you do trigger the MPAA, a pension provider will give you a statement or certificate.

This is known as a flexible access statement. You then have to inform your current scheme within 91 days (3 months) of receiving some notice. Failure to do so could result in a small fine from HMRC.

What about any defined benefits schemes, that I am contributing to ?

It will not affect your current benefits and level of contributions into a existing defined benefits scheme. Or a deferred DB scheme sitting their dormant, such as with a previous employer.

If you are contributing to a defined contribution scheme such as an AVC pot, you can still contribute the full amount through your annual allowance.

So a simple example:

Say you are paying £ 5,000 into a DC pension, you can still pay £ 55,000 in a DB pension, so £ 60,000 in total. This is known as the alternative allowance.

So what about unused allowances ?

Under normal conditions, if you received a windfall or inheritance, bonus etc.

You can contribute any unused allowances from your previous 3 years into a pension. As long a you were a member of a registered pension scheme.

If you trigger the MPAA, you cannot bring forward any unused allowances from the three previous tax years.

But is can be possible to make additional contributions into a DB pension, subject to the  rules of that respective scheme.

Hopefully the above has explained the basics of how and when the MPAA is triggered.

Further information can be found at :

http://www.gov.uk/tax-on-your-private-pension/annual-allowance

Finally, when will the MPAA apply ?

It will normally become applicable, once the 1st payment is paid via an Annuity.

Or on the 1st payment if you access on a flexible basis, so via FAD or UFPLS.

If you found the above information useful or wish to look at other blog posts about pensions, check them out in www.moneyminted.co.uk