Managing the Money Purchase Annual Allowance limit

As pension drawdown options grow in popularity, the limit of how much you can pay into your Money Purchase Pension Scheme reduced from £10,000 to £4,000 if you have flexibly accessed a Money Purchase Pension Scheme.

There’s a danger of unexpected tax bills as people may have little understanding of the limits, or the consequences of exceeding them.

What is the Annual allowance?

The Annual Allowance (AA) is the limit on how much money you can build up tax-free in your pension (in any one tax year) while still benefiting from tax relief. It’s not the maximum pension contributions you can make. But you wouldn’t get tax relief on contributions over the annual allowance.

What is the Money Purchase Annual Allowance?

Generally, once a person accesses their pension benefits on a flexible basis, and takes an income (standalone lump sums, or UFPLS) from their pension pot, the MPAA will apply to future money purchase funding but the overall Annual Allowance remains the same (which is relevant if you are an active DB scheme member). When it was introduced (at the same time as pension freedoms) in 2015 the MPAA was set at £10,000. This limit was cut to £4,000 from April 2017 where it remains today.

If you have taken more than your tax free cash (from a flexi-access drawdown plan), even just £1, then your annual pension allowance for money purchase funding will be restricted down by the MPAA for the rest of your life.

Will this apply to me?

By and large, if you are over 55 and have not taken anything from your Money Purchase Pension, or only ever taken your Pension Commencement Lump Sum (PCLS), also known as ‘tax-free cash’, then you will not be affected.

Why was the MPAA reduced?

The chancellor, Philip Hammond, stated that the MPAA came into force “to prevent inappropriate double tax relief”. In other words, preventing people from diverting a significant proportion of their earned income into their pension then withdrawing up to the 25% allowed tax free and/or recycling tax free lump sums back into their pension.

What happens if I go above the MPAA?

The amount that you have gone over will be added to your income for that year and you will be charged income tax accordingly. You should note that the additional income you are being taxed on could push you into a higher income tax bracket.

Can you carry forward the MPAA from previous years?

MPAA is set at £4,000 a year. While you cannot use carry forward rules to increase your MPAA, carry forward rules can still be used in respect of Defined Benefits pension funding.

How does the MPAA limit apply?

Once it is triggered, the MPAA will apply for the rest of your life. The MPAA includes both your own contributions and any other contribution made on your behalf from your employer (or other third party) into a pension. It should be noted that the limit is per person rather than per scheme, and applies across all contributions made in a year.

Important: Before making any income withdrawals or large contributions into your pension provision we strongly recommend seeking independent financial advice.

Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate taxation advice.
www.gov.uk/government/publications/reducing-the-money-purchase-annual-allowance/reducing-the-money-purchase-annual-allowance