Money Purchase Annual Allowance (MPAA)
These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.08 May 2017 Back to results
Individuals who flexibly access pension benefits from a money purchase arrangement are subject to a money purchase annual allowance (MPAA) that limits the contributions they can make to money purchase pension arrangements. The money purchase annual allowance (MPAA) was introduced on 6 April 2015 and was based on amount of £10,000 pa for the 2015/16 and 2016/17 tax years (note – the 2015/16 tax year was split into two mini tax years known as mini tax year 1 and mini tax year 2 to help accommodate all pension input periods having to run in line with tax years from 6 April 2016).
From 6 April 2017 onwards, the position isn’t currently clear. The government had intended to reduce the MPAA limit from £10,000 pa to £4,000 pa with effect from 6 April 2017. However, the legislation to change this was removed from the Finance Act 2017. The current government still intends to proceed with the reduction at the earliest opportunity following the general election on 8 June 2017. However, it’s not clear whether the reduction will take effect from 6 April 2017, 6 April 2018 or from another date. There is also the issue of what would happen in the event of a change of government as they may decide to do something different.
Since 6 April 2015 a reduced annual allowance in respect of money purchase pension contributions, known as the money purchase annual allowance (MPAA), applies to individuals who have flexibly accessed their pension benefits.
HMRC introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the new flexibility rules.
It is only when pension benefits have been flexibly accessed that the MPAA will apply. This includes various different options (known as trigger events) such as:
- Taking an uncrystallised funds pension lump sum (UFPLS).
- Taking income above the maximum GAD limit from an existing capped drawdown arrangement.
- Being in flexible drawdown at any time before 6 April 2015 as a member (not a dependant). (whether the member had taken income or the flexible drawdown policy still existed at 6 April 2015 is irrelevant).
- Going into flexi-access drawdown from an existing capped drawdown arrangement or with uncrystallised funds and then subsequently taking income.
- Taking a stand-alone lump sum from a money purchase arrangement where someone has primary protection and a protected tax-free lump sum greater than £375,000 at 5 April 2006.
The MPAA will not apply in the following circumstances:
- Taking income from an existing capped drawdown arrangement which is within the existing GAD limit.
- Taking a pension commencement lump sum, and
- buying a lifetime annuity (i.e. not accessing new flexible annuity options), or
- moving to a flexi-access drawdown arrangement and taking NO income.
- Taking a small pots lump sum.
- Taking income from a beneficiary’s flexi-access drawdown.
A trigger event will not occur where the whole of the fund is made up of a disqualifying pension credit at the time of a payment from the member’s flexi-access drawdown fund. A disqualifying pension credit is where the pension credit in relation to a pension sharing order comes from benefits already in payment.
The trigger date is generally immediately before benefits have first been flexibly accessed (i.e. the trigger event). Further details of what the trigger date is can be found at:
Pension providers have to formally tell individuals of the date that they flexibly accessed their pension benefits, including an explanation of the possible implications, within 31 days of the trigger date. Individuals will then be required to pass on the information they received from the pension provider they were flexibly accessing funds from to all other administrators of money purchase pension schemes they are contributing to within 91 days.
The MPAA only applies to money purchase contributions being made. So it is still possible for an individual to accrue benefits in a defined benefits (including final salary) scheme up to the current standard annual allowance of £40,000, but taking into account any money purchase contributions that will be counted against the MPAA as detailed above. If the money purchase contributions exceed the MPAA then an ‘alternative annual allowance’ (the standard annual allowance minus the MPAA) plus any carry forward will apply to any defined benefits accrual. For the 2016/17 tax year, the alternative annual allowance was £30,000 pa (£40,000 less a £10,000 MPAA).
In the first tax year that the MPAA applies, it is only contributions paid to money purchase arrangements after the trigger event that are measured against the MPAA. For subsequent tax years, all contributions made to money purchase arrangements in a tax year will count towards the MPAA.
The following is a very basic example of how money purchase pension contributions are treated in the tax year that a trigger event applies.
- Employer pays monthly contributions of £1,000 on the 1st of each month.
- Pension input period (PIP) is tax year 2017/18 (Since tax year 2016/17, pension input periods are just set to the tax year).
- Trigger date is 1 November 2017 – The trigger date is immediately before benefits have first been flexibly accessed (e.g. taken as an UFPLS or as flexi-access drawdown).
|Contributions paid from 1 May 2017 to 1 November 2017 inclusive||7 x £1,000 = £7,000|
|Trigger date||1 November 2017|
|Contributions paid from 1 December 2017 to 1 April 2018 inclusive||5 x £1,000 = £5,000|
The contributions paid before or on the trigger date will be measured against the alternative annual allowance (£40,000 less the MPAA). Those paid after the trigger date are measured against the MPAA.
For tax year 2018/19 onwards, if contributions were to continue at £1,000 per month, the full annual contribution total of £12,000 would be tested against the MPAA.
Where someone has exceeded the MPAA, they will be subject to the annual allowance charge. Further information can be found under our Annual Allowance FAQs.
Please note, however, that a scheme can but is not obliged to use scheme pays where the MPAA is exceeded but not the annual allowance of £40,000.
An individual cannot use carry forward to reduce a charge on a money purchase input amount above the MPAA in the current tax year. In other words, you cannot use carry forward allowances to make or justify money purchase contributions in excess of the MPAA. Carry forward, however, can be used to make or justify any pension savings above the alternative annual allowance (the standard annual allowance minus the MPAA) for any defined benefits accrual.
Where the MPAA provisions apply in the current tax year, the amount that can be paid will depend on whether the money purchase input total for the current tax year is more than the MPAA.
Where a member has flexibly accessed their pension rights, and they have exceeded their MPAA for the current tax year, the alternative annual allowance plus any available carry forward is the maximum annual allowance amount available for any pension savings to defined benefits schemes.
Where the MPAA has not been exceeded in the current tax year, the maximum annual allowance amount available is based on the standard annual allowance in the current tax year (less any contributions paid or value of any defined benefits accrual) plus any available carry forward.
If the MPAA is not exceeded in the current tax year, then the unused amount cannot be carried forward to make money purchase contributions above the MPAA in a future tax year. Any unused carry forward amounts in the current tax year can only be used in a future tax year to make pension savings for defined benefits accrual.
What if the tapered annual allowance applies as well as the MPAA?(Expand content) (Minimise content)
Where someone is subject to the tapered annual allowance (see our Tapered Annual Allowance FAQs) and they are also subject to the MPAA, the taper is applied to their alternative annual allowance amount. The alternative annual allowance amount is the standard annual allowance less the MPAA.
For the 2016/17 tax year, if someone was subject to the maximum taper provisions, then their annual allowance for that tax year would have been £10,000 pa. This means that the MPAA limit would have been £10,000 and their alternative annual allowance for defined benefits savings would have been nil. In addition, it would still have been possible to use carry forward for any unused defined benefits pension savings from the previous three years.
For 2017/18, the alternative annual allowance for a tax year where the maximum taper provisions apply could either be nil (if the MPAA remains at £10,000 pa) or £6,000 pa (being the £10,000 tapered annual allowance less a £4,000 MPAA, should the MPAA limit for 2017/18 be £4,000 pa). It will also be possible to use carry forward for any unused defined benefits pension savings from the previous three years.
You can find more information on the MPAA in HMRC’s Pensions Tax Manual at:
Pensions Technical Services