The government responded to their consultation on a reduction to the money purchase annual allowance (MPAA) on 20 March. Despite pressure from industry, the reduction is going ahead.
Before we get onto the MPAA, it is worth a resume of the “normal” annual allowance rules. Everyone ordinarily has an annual allowance of between £10,000 and £40,000 that covers:
* The increase in active defined benefits schemes. Broadly, 16 times the pension increase.
* Pension contributions made to a defined contribution arrangements including personal, employer and third-party contributions.
If the annual allowance is exceeded, unused allowance from the three previous tax years can be “carried forward” to increase it. Where the allowance is exceeded, the excess is taxed at your marginal rate.
A scheme can be required to pay the charge out of your benefits if you have exceeded £40,000 in their scheme and your tax charge exceeds £2,000. Where the amounts are lower, the scheme can still pay voluntarily.
The origins of the MPAA
From April 2011, you could take your whole pension as a lump sum under the old flexible drawdown rules if you had secure income of £12,000 a year. If you did, future contributions were effectively banned as your AA became zero.
With pension freedoms, flexibility was available to all and as the intention was to allow people to work flexibly and keep saving into a pension there was a need for something new. With access to large lump sums the government had to prevent people ”recycling” their pensions purely to get further tax relief.
The new rule was the MPAA, which was initially set at £10,000, and £4,000 from 6 April 2017.
How does the MPAA work?
From the tax year that someone first flexibly accesses their pension they are subject to the MPAA. Future money purchase contributions are restricted to £4,000. If you exceed £4,000, the AA you have for defined benefits is reduced by £4,000.
Carry forward cannot be used. Importantly, the rules for when you can force your scheme to pay are unlikely to be usable. You need to exceed £40,000 and the excess alone generates a charge of £2,000 or more.
How do you flexibly access benefits?
There are 7 ways, known as MPAA triggers:
1. Uncrystallised funds pension lump sum (UFPLS)
This is a new type of lump sum payment introduced from April 2015 and the payment of one triggers the MPAA.
2. Flexi-access drawdown
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 is taken, the MPAA applies from the date of the payment.
3. Capped drawdown income above cap
Those in “capped drawdown” on 5 April 2015 continued with the same rules in place. However, if they choose to take an income above their cap the MPAA will apply from when the income payment that breaches it is paid.
4. Existing flexible drawdown
People who had flexible drawdown funds immediately before 6 April 2015, were treated as having triggered on 6 April 2015 as their drawdown became flexi-access on this date.
