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.03 January 2018 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 future contributions they can make to money purchase pension arrangements. The MPAA was introduced on 6 April 2015 and was £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). See our separate Pension input amounts FAQs for more information.
The MPAA was reduced from £10,000 to £4,000 with effect from 6 April 2017 by the Finance (No2) Act 2017.
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 money purchase 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 pensions flexibility rules.
It is only when pension benefits have been flexibly accessed that the MPAA will apply. This includes various different benefit options (known as trigger events) such as:
- Taking an uncrystallised funds pension lump sum (UFPLS).
- Going into flexi-access drawdown from an existing capped drawdown arrangement or with uncrystallised funds and then subsequently taking income.
- 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.)
- 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.
A payment of one of the types of benefits listed above from an overseas pension scheme that has benefitted from UK tax relief, eg where a transfer has been made from a UK registered pension scheme to a qualifying recognised overseas pension scheme, is also a trigger event.
The MPAA will not apply in the following circumstances:
- Taking income from an existing capped drawdown arrangement which is within the 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 date of the first 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 first flexibly accessed their pension benefits, including an explanation of the possible implications, within 31 days of the trigger date. This formal notification is known as a 'flexible-access statement'. 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 of the date of receipt of the flexible-access statement (or within 91 days of starting to make contributions if they weren’t contributing to the scheme in the period between the date of the relevant trigger event and the date they received the flexible-access statement.
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 scheme up to the current full 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 full annual allowance minus the MPAA) plus any carry forward will apply to any defined benefits accrual. From the 2017/18 tax year, the alternative annual allowance will be £36,000 pa (£40,000 less a £4,000 MPAA) or a lesser amount if the tapered annual allowance also applies to the individual in a tax year. See What if the tapered annual allowance applies as well as the MPAA? for more information.
In the first tax year that the MPAA applies, it is only contributions paid to money purchase arrangements after the date of the first 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 the first 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 run in line with the tax year).
- Trigger event for the MPAA takes place on 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. In this example an annual allowance tax charge would arise as contributions after the trigger event exceed the £4,000 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.
The individual can pay the tax charge from their own resources or, in certain circumstances, can ask their pension scheme to pay part or all of the tax charge on their behalf. See Can scheme pays be used where the MPAA applies? for more information.
If a member is subject to the MPAA, the statutory conditions for scheme pays still have to be met before the member has a right to use scheme pays. This means that their pension input amount to the scheme still has to exceed the full annual allowance (currently £40,000), and not just exceed the MPAA, before the scheme has to pay part or all of the member’s annual allowance charge, if requested to. Additionally, the maximum amount of annual allowance charge that a member can require their scheme to pay on their behalf is the tax charge that relates to their pension input amount in excess of the full annual allowance (currently £40,000). See our separate Annual allowance charge – scheme pays FAQs for more information.
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 full 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 accrued under defined benefit schemes 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 any unused annual allowance can be carried forward from the previous three tax years and added to the alternative annual allowance, or the individual’s reduced annual allowance if they are subject to the tapered annual allowance rules, for any defined benefits pension savings.
Where the MPAA has not been exceeded in the current tax year, the maximum annual allowance amount available is based on the full annual allowance, or the individual’s reduced annual allowance if they are subject to the tapered annual allowance rules, 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 full annual allowance less the MPAA.
From tax year 2017/18, the alternative annual allowance for a tax year where the maximum taper provisions apply will be £6,000 pa (being the £10,000 tapered annual allowance less a £4,000 MPAA). 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