Money Purchase Annual Allowance

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Money Purchase Annual Allowance (MPAA)

The amount of tax relieved savings that an individual can usually attribute to a single tax year are limited to the annual allowance – currently £40,000. However, from the 2015/16 tax year, individuals who have flexibly accessed a money purchase arrangement will, in certain circumstances, trigger a Money Purchase Annual Allowance in place of the standard annual allowance.

Where the money purchase annual allowance has been triggered then individuals will have a limit on money purchase inputs, currently set at £4,000, for the tax year in which they first flexibly access their benefits and every subsequent tax year.

If the money purchase annual allowance limit of £4,000 is exceeded, individuals will then have a reduced annual allowance for the remainder of any non money purchase pension savings. This reduced annual allowance is defined in the legislation as the alternative annual allowance and is currently set at £36,000. It will be less where the tapered annual allowance also applies.

Trigger events

A trigger event determines when the individual first flexibly accesses a money purchase arrangement. The trigger events are as follows: 

• Payments from newly designated member flexi-access drawdown funds
  If an individual has a member’s flexi-access drawdown fund the trigger event occurs immediately before either the first payment of income withdrawal is made from that member flexi-access drawdown fund or the payment of a short-term annuity. 
• Converting pre-6 April 2015 member drawdown pension funds into member flexi-access drawdown funds
  If an individual has a member’s drawdown pension fund that came into effect before 6 April 2015 and the member has not made a valid declaration for flexible drawdown then the trigger event will occur immediately before any payment that causes the fund to covert to flexi-access.
• Qualifying for flexible drawdown before 6 April 2015
  A trigger event occurs at the start of 6 April 2015 for an individual if, before 6 April 2015, a scheme administrator had accepted a valid declaration that the individual met the flexible drawdown conditions.
• Uncrystallised funds pension lump sums
  A trigger event occurs for an individual when an uncrystallised funds pension lump sum is paid to the individual for the first time. 
• Stand-alone lump sums
  A trigger event occurs for an individual when a stand-alone lump sum is paid to the individual when the individual has primary protection and a protected tax-free lump sum right which is greater than £375,000. 
• Lifetime annuities that can reduce in amount
  If an individual becomes entitled to a lifetime annuity where the entitlement occurs on or after 6 April 2015 and the terms of the annuity contract allow decreases in the amount of annuity payable other than in prescribed circumstances a trigger event occurs immediately before the first payment of the annuity.
• Scheme pensions from pension schemes with less than 12 pensioners
  If an individual becomes entitled to a scheme pension after 6 April 2015 under a money purchase arrangement with less than 11 members, the trigger event occurs immediately prior to the first payment.
• Payments from overseas pension schemes
  Payment of one of the types of benefits listed above from an overseas pension scheme that has benefitted from tax relief will also be a trigger event.

• payment of a pension commencement lump sum
• payment of a trivial commutation lump sum 
• payment of funds from a money purchase arrangement as a ‘small lump sum’ 
• entitlement to a scheme pension under a money purchase arrangement where at least 11 other individuals are receiving a scheme pension or dependants’ scheme pension
• entitlement to a lifetime annuity that cannot decrease in amount except in prescribed circumstances from 6 April 2015, no more than the permitted maximum for capped drawdown continues to be paid from a pre-6 April 2015 drawdown pension fund 
• payments from a dependants’ flexi-access drawdown fund 

When the MPAA is not exceeded

Where the individual’s money purchase pension inputs do not exceed the MPAA their total input for the year is tested against their available annual allowance and any unused money purchase annual allowance cannot be carried forward to later tax years.

Example 1 Client A has a defined benefit pension and a money purchase arrangement and has triggered the MPAA. They are not subject to the tapered annual allowance but will now become subject to both an annual allowance test and a MPAA test. Contributions to a personal pension totalled £2,000 for the current year so the MPAA has not been breached and total inputs will be tested against the standard £40,000 annual allowance. The defined benefit input for the year was £35,000 giving an overall annual allowance input of £37,000 for the year (£35,000 + £2,000) so no annual allowance charge will apply and Client A has £3,000 allowance remaining that can be carried forward. For the subsequent tax year they will have an overall allowance of £43,000. The MPAA limit remains at £4,000 and the alternative annual allowance limit will be £39,000, comprising of the standard alternative limit of £36,000 plus the £3,000 carry forward allowance.

When the MPAA is exceeded

As If the individual’s money purchase pension input amounts do exceed the MPAA a charge will arise based on the following:-

Firstly, the excess over the MPAA is added to any excess input (if any) of the other inputs above the alternative annual allowance plus any carry forward to establish a chargeable amount – the alterative chargeable amount.

Next, the individual’s total pension input amount for the tax year is also tested against the available annual allowance plus any carry forward to establish how much (if any) is over the available limit and potential subject to an annual allowance charge – the default chargeable amount.

The annual allowance charge will apply to the higher of the two resulting amounts. 

Example 2 Client B has a defined benefit pension and a money purchase plan, is not subject to tapering and has triggered the MPAA. The total input for the year was £35,000 including £8,000 to a personal pension all of which was made after the trigger event that gave rise to the MPAA test. As a result money purchase limit has been exceeded by £4,000 The input to her defined benefit scheme was £27,000 which is less than the alternative annual allowance of £36,000 (£40,000 - £4,000). As Client B has exceeded her MPAA for the year she will need to work out what her chargeable amount will be.  The alternative chargeable amount is the excess of £8,000 over £4,000 = £4,000, plus the excess of £27,000 over £36,000 = £0. The default chargeable amount is the excess of £27,000 plus £8,000 over £40,000 = £0 As a result the alternative chargeable amount will apply so Client B is subject to an annual allowance charge against £4,000 of her total inputs.

Important Information

The information provided is based on our current understanding of the UK legislation and may be subject to amendments as a result of changes in legislation.

All references to taxation are based on our understanding of current UK taxation law and may be affected by future changes in legislation, the individual circumstances of the investor and pension scheme conditions.

The information provided in this article is not intended to offer advice.