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.21 October 2016 Back to results
Since 6 April 2015 a reduced annual allowance of £10,000 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 of £10,000 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 5 April 2005 as a member (not a dependant). [Whether they have 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 for an individual who has primary protection with associated registered tax-free cash
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 of £10,000 only applies to money purchase contributions being made. So it is still possible for an individual to accrue benefits in a defined benefit (including final salary) scheme up to the current overall annual allowance of £40,000, but taking into account any money purchase contributions that will be counted against the £10,000 MPAA as detailed above. If the money purchase contributions exceed the MPAA of £10,000 then an alternative annual allowance (the ‘normal’ annual allowance minus the money purchase annual allowance) of £30,000 plus any carry forward will apply to any defined benefit accrual.
The following is a very basic example of how money purchase pension contributions are treated in the tax year that the trigger event applies.
- Employer pays monthly contributions of £2,400 on the 1st of each month
- Pension input period (PIP) is tax year 2016/17 (Since tax year 2016/17, pension input periods are just set to the tax year.)
- Trigger date is 1 November 2016 – 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 2016 to 1 November 2016 inclusive||7 x £2,400 = £16,800|
|Trigger date||1 November 2016|
|Contributions paid from 1 December 2016 to 1 April 2017 inclusive||5 x £2,400 = £12,000|
The contributions paid before or on the trigger date will be measured against an alternative annual allowance of £30,000 (£40,000 - £10,000). Those paid after the trigger date are measured against the £10,000 MPAA.
There will be a tax charge due on excess contributions of £2,000 paid after the trigger date regardless of the total contributions paid in the PIP being less than £40,000.
After the tax year that the trigger date occurs, all money purchase contributions made in a tax year over £10,000 are subject to a tax charge.
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 of £10,000 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 money purchase annual allowance. Carry forward, however, can still be used to increase the alternative annual allowance for any defined benefit accrual.
Where the money purchase annual allowance provisions apply, for carry forward from tax years from 2016/17 onwards, the amount that can be carried forward will depend on whether the money purchase input total for pension input periods ending in the tax year is more than the money purchase annual allowance.
Where a member has flexibly accessed their pension rights, and they have exceeded their money purchase annual allowance for the tax year, the alternative annual allowance (the ‘normal’ annual allowance minus the money purchase annual allowance) plus any available carry forward is the annual allowance amount available for their defined benefit input sub-total.
Where the money purchase input sub-total is not more than the money purchase annual allowance, the amount that can be carried forward is the excess of the ‘normal’ annual allowance over the total input amount (i.e. as applies currently). Remember, carry forward can’t be used to increase the money purchase annual allowance. It can only be used to increase the alternative annual allowance.
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 £10,000 MPAA.
This means that where someone is subject to the maximum taper provisions, their alternative annual allowance for defined benefit pension savings will be nil. They would, however, still have a £10,000 MPAA limit and would still be able to use carry forward for any unused defined benefit pension savings from the previous three years.
Pensions Technical Services