Up-to-date Money Purchase Annual Allowance Rules

MPAA Explained

From 6^th April 2015, the Taxation of Pensions Act 2014 and The Pensions Schemes Act 2015 brought greater freedom and flexibility for members’ access to their defined-contribution (DC or ‘money purchase’) pensions.

To prevent gaming of the system for tax advantages, it restricted further pension pot contributions once you first use this flexibility.

Such is the Money Purchase Annual Allowance rules, or MPAA. Any Benefit Crystallisation Event (BCE, or ‘trigger event’) can entail a 90% reduction in further tax-relieved contributions, from the current £40,000 money purchase arrangement – for most – to £4,000. All contributions count, whatever the source; any unused allowance cannot be carried forward.

For support around your existing pension speak with one of our advisors.

Eight MPAA triggers

At ‘pension freedom age’, currently, 55, rising to 57 in 2028, DC scheme members have various options for taking tax-relieved cash from their ‘pot’ or ’pots’. At least eight could be MPAA trigger events.

1. Uncrystallised Funds Pension Lump Sum (UFPLS)
   ‘Uncrystallised’ means a pot not yet used to pay a benefit. You can take up to 100% of the pot or several smaller sums. For each, 25% is tax-free; the balance is taxed charged as income. This reduces your pot, while MPAA will undermine its regrowth.

2. Flexi-Access Drawdown Income (FADI)
   MPAA applies from the date of the first payment under any plan established on or after 6^th April 2015 for periodic drawdowns from a pot. There are exceptions for a dependent, successor, or nominee drawdowns, or if payment is taken wholly from a Disqualifying Pension Credit (DPC), e.g., when divorced partners share a pension.

3. Existing flexible drawdown
   If your drawdown plan was established before 6^th April 2015, it already triggered MPAA on that date, when it automatically became FADI.

4. Flexible Annuity
   Annuity entitlement occurring on or after 6^th April 2015 may trigger MPAA if it is flexible in prescribed ways. Consult your adviser.

5. Pension scheme with fewer than 12 members
   If your pension entitlement began on or after 6^th April 2015 and you are in a scheme with fewer than 11 others also entitled, MPAA is triggered.

6. Exceeding capped drawdown income
   If your scheme allows and you stray above the cap on your drawdowns, MPAA is triggered.

7. Payments from overseas pension schemes
   Did you work abroad for several years, enrolling in an overseas pension provider scheme that attracted tax relief, e.g., a Qualifying Recognised Overseas Pension Scheme (QROPS)? Your first payment from that scheme will trigger MPAA.

8. Stand-alone Lump Sums (SALS)
   If you have pre-April 2015 entitlement to take an entire pot as a tax-free lump sum, with primary or enhanced cash protection, MPAA is triggered when you make the payment.

It all seems pretty daunting.

How to mitigate, postpone, even avoid MPA

Here are six options

1. Defined benefit (DB) schemes
   If you are in receipt of income from a DB or ‘final salary scheme’, MPAA does not apply. However, if you also have a DC pot where you had a BCE and exceeded the ensuing £4,000 MPAA limit, the Annual Allowance for your DB contributions is reduced by £4,000.

2. Pension Commencement Lump Sum (PCLS), nil income
   If you take your tax-free PCLS and invest the balance of your pot in a drawdown plan, MPAA is not triggered until the first drawdown payment.

3. Disqualifying Pension Credit Usage
   As outlined regarding FADI, the divorced partner of a spouse who received the PCLS cannot also do so but can draw income from the DPC without activating MPAA.

4. Beneficiary Flexi-Access Drawdown Income
   Designation of pension death benefits for FADI does not trigger MPAA.

5. Small pots, or Small Lump Sums (SLS)
   Without triggering MPAA, you can take up to three under-£10,000 payments from a non-occupational DC scheme or any number from an occupational plan. Each sum is 25% tax-free, with the balance taxed at your marginal rate. For non-occupational plans, the payments must extinguish all further benefits from that arrangement (a scheme may have several). In occupational schemes, the payments must extinguish all further benefits from the paying scheme.

6. Use benefits non-flexibly
   See also Item 4(Flexible Annuity). If you avoid Flexi-access, say, by using your drawdown plan to buy non-flexible annuities, MPAA is not triggered.

Notification rules

Your scheme administrator must send you a Flexible-Access Statement within 31 days of the MPAA trigger date, notifying you of the BCE and telling you what to do.

You must notify any other DC scheme where you are a member within 91 days of receiving the statement. Failure can incur a £300 fine, plus up to £60 for every day your error persists.

Money Purchase Annual Allowance, conclusion

Although complicated, MPAA is essential to even-handed enablement of the April 2015 pensions flexibility. After all, the previous post-access contributions allowance was zero.

 With professional advice, therefore, your pension savings will provide adequate flexibility while minimising the impact of MPAA.

Related content: Pension Lifetime Allowance explained