The MPAA (money purchase annual allowance) was introduced with pension freedoms and this limits the amount of money which can be contributed to a money purchase scheme once pensions have been flexibly accessed before a tax charge is payable.
MPAA rules- what do you need to know?
The money purchase annual allowance gives a lower annual allowance for money purchase contributions where flexibility has been accessed.
The MPAA does not replace the current annual allowance rules (or reduce the normal annual allowance).
There are various events which trigger the money purchase annual allowance.
Once the money purchase annual allowance has been triggered then there are notification requirements.
How does the MPAA work?
The Money Purchase Annual Allowance (MPAA) was introduced by the Taxation of Pensions Act 2014, on 6 April 2015. It is designed to discourage individuals who seek to abuse the new flexible pension rules to avoid tax and potentially National Insurance Contributions by introducing a lower annual allowance for defined contribution/ money purchase contributions where flexibility has been accessed.
The Money Purchase Annual Allowance was:
£10,000 for tax years 2015/16 and 2016/17; and
£4,000 for tax year 2017/18 and to date.
The MPAA does not replace the current Annual Allowance rules (or reduce the normal annual allowance). Those who have triggered the Money Purchase Annual Allowance (MPAA) cannot use carry forward to increase the MPAA limit in any tax year.
It’s also important to remember that the all inputs to a money purchase scheme count for the MPAA. It’s the pension input that matters, not whether it was made by the member, a third party or their employer.
The Annual Allowance is the primary allowance to consider, however, when a trigger event happens the MPAA rules will also apply.
When both rules apply, a comparison is required of the:
default chargeable amount, the chargeable amount under the current rules; and
alternative chargeable amount, the chargeable amount under the new rules.
The higher of the two figures is used. We demonstrate how the calculations work in MPAA – Case studies
The MPAA will apply from when pensions flexibility has been accessed, however, it will only be of consequence where total contributions to a money purchase arrangement in a Pension Input Period exceed £4,000.
Accessing flexibility is referred to as a ‘trigger event’ and means:
Uncrystallised Funds Pension Lump Sum (UFPLS)
Where a member accesses their pension fund via an UFPLS this is regarded as a trigger event and the MPAA rules will apply.
Flexi-access Drawdown Income A designation of funds for flexi-access drawdown does not in itself trigger the MPAA, nor does the payment of a PCLS. However, once income (or any lump sums from the designated pot) are taken from the funds designated to a flexi-access drawdown plan, the MPAA will apply (see also Accessing Benefits without Triggering the MPAA below). However, should the income be taken from any dependant, nominee or successor drawdown plans or assets that can be wholly attributable to a Disqualifying Pension Credit then the MPAA will not be triggered.
Capped Drawdown Income Above Cap
Those clients in “capped drawdown” on 5 April 2015 may continue in capped drawdown. The current system for calculating and reviewing the cap is expected to remain in place. If the member then chooses to take an income in excess of their cap the MPAA will apply. This will be subject to the scheme allowing a payment in excess of the cap to be paid (leading to converting the plan from capped to flexi-access immediately before the excess payment is made).
Existing Flexible Drawdown
Where clients had flexible drawdown funds immediately before 6 April 2015, they were treated as having accessed flexibility on 6 April 2015 as their drawdown became flexi-access on this date.
Stand-Alone Lump sums
Where a person has Primary Protection with protected lump sum rights i.e. lump sum rights in excess of £375,000 at 5 April 2006, the MPAA will apply if they are paid a standalone lump sum. For more information on a stand-alone lump sum please refer to our Tax-free protection article.
Flexible Annuity Where entitlement to an annuity occurred on or after 6 April 2015 and it varies in ways that are not currently permitted by SI2006/568 this will count as having accessed flexibility and the MPAA will be triggered. This is detailed in The Registered Pension Schemes (Prescribed Manner of Determining Amount of Annuities) Regulations 2006.
Scheme Pension with less than 12 members Where entitlement occurred on or after 6 April 2015 under a money purchase arrangement where, at the time of that entitlement, fewer than 11 other individuals were entitled to the present payment of a scheme pension, or dependants’ scheme pension, under the same pension scheme.
However, if the scheme pension is payable under an annuity contract which was treated as having become a registered pension scheme then the trigger does not apply.
Avoiding the MPAA
Defined Benefit arrangements If you receive a scheme pension from any defined benefit arrangement this will not trigger the MPAA.
Small Pots or defined benefits triviality payment
The small pots rules were amended following the announcement of pensions freedoms to allow three pots of up to £10,000 to be withdrawn from non-occupational DC pension funds, for occupational DC pension pots there is no limit on the number of small pots that can be taken. This is paid 25% tax free and 75% subject to marginal rate income tax in the same way as an UFPLS. However, a small pots payment does not trigger the MPAA.
Where a client has a need for capital but wishes to continue funding in future then PCLS can be paid with the balance being vested to drawdown. This will not trigger the MPAA until income is taken from the drawdown plan.
Beneficiary Flexi-access Drawdown Income
A designation of pension death benefits for flexi-access drawdown does not trigger the MPAA. This includes income taken from any dependant, nominee or successor drawdown plans.
Disqualifying Pension Credit Usage
A client will have no access to PCLS from a Disqualifying Pension Credit (as the ex-spouse's pension was already in payment there would be no further access to PCLS). Any income taken wholly from a Disqualifying Pension Credit will not trigger the MPAA.
Accessing benefits non flexibly
As long as the flexible access detailed above is avoided then a member will not trigger the MPAA. An example of this is taking a non-flexible annuity.
Money Purchase Annual Allowance calculation
Operation of MPAA
The following provides a summary of the various steps in determining if the MPAA applies. We demonstrate how the calculations work in MPAA – Case studies.
Please note where a tapered annual allowance also applies, this replaces the standard annual allowance for the relevant tax year, and is used in calculations for the alternative annual allowance and alternative chargeable amount.
What are the MPAA rules?
1. Calculate the chargeable amount on the Money Purchase Input Sub-Total (MPIST)
Total of Money Purchase Inputs post-trigger
MPIST chargeable amount
2. Calculate the chargeable amount on the Defined Benefit Input Sub Total (DBIST)
Total Defined Benefit Inputs for full PIP
Money Purchase Inputs pre-trigger date
Less(£36,000 or the relevant lower amount should the tapered annual allowance apply plus carry forward)
DBIST chargeable amount
3. Calculate the Alternative Chargeable Amount (ACA)
Step 1 (MPIST) result
Step 2 (DBIST) result
Alternative Chargeable Amount
4. Calculate the Default Chargeable Amount (DCA)
The chargeable amount under the default rules gives the Default Chargeable Amount.
DCA = Contribution paid in PIP- Standard Annual Allowance
5. Identify Chargeable Amount
The chargeable amount is the higher of the ACA and the DCA.
Where a member first flexibly accesses their pension savings, the scheme administrator must provide the member with a statement confirming the date the first payment occurred and setting out what they must do. They will be required to do this within 31 days of the flexible access occurring. If the member (or another scheme administrator) has already informed the scheme administrator that they have flexibly accessed another scheme then the scheme administrator does not need to provide the member with a statement.
Members then need to tell any other pension scheme that they are an active member of, that they have flexibly accessed their pension savings, but excluding any DB only schemes. This notification must be provided within 91 days of receiving the statement or within 91 days of becoming an active member, whichever is the later.
Failure by the member to notify their other pension schemes that they have flexibly accessed benefits can incur a £300 fine, and daily penalties of up to £60 for every day the failure to provide this information continues after the £300 levy has been applied. This is detailed in the Pensions Tax Manual.
Overall, these rules are positive as they allow those who have accessed flexibility to continue to benefit from pension contributions; compared to the previous “Flexible Drawdown” (replaced by Flexi-access drawdown in April 2015) rules where the annual allowance was zero. This is particularly important given changing retirement patterns and the fact that it is now common for pension contributions to continue after initial crystallisation. A continuation of the previous zero AA would have resulted in issues in future. However, the reduction in MPAA could impact those who access benefits flexibly and then belong to a pension scheme where the employer pays more than the minimum required by auto-enrolment.