Over the past few years, we’ve seen a rise in people accessing their pension benefits after the age of 55 and then continuing in work, or returning to the workforce. However, continuing to pay into your pension after taking a taxable payment from your pension, could lead to an unexpected tax charge. So, here’s everything you need to know about the Money Purchase Annual Allowance (MPAA) and what it means for your pension savings.
What is the Money Purchase Annual Allowance?
The MPAA limits the amount that you can contribute to your pension and continue to receive tax relief once you have flexibly accessed your benefits. The allowance was introduced to prevent an individual from recycling money back into their pension and attracting additional tax relief.
How does it work?
While you’re paying into your pension, you can normally save up to £40,000 per year, or 100% of your annual income. But once you flexibly access your pension, which means withdrawing £1 or more of taxable income, the MPAA is triggered and your allowance will drop to £4,000 per year.
While £4,000 may initially seem like a large sum, this is spread across a twelve-month period. So, depending on the salary you’re receiving, you could exceed the allowance without realising, especially if your employer also contributes into your pension on your behalf.
What are the challenges?
One of the challenges the MPAA creates, is that it restricts the amount you can pay into your pension after you’ve started to take your benefits. So, if you want to continue in work after accessing your pension or return to work and start paying back into your pension, you will only be eligible for tax relief up to the allowance of £4,000. This could create a barrier if you’re looking to rebuild your pension savings.
And there isn’t just your pension contribution to consider. Any contributions your employer makes alongside any tax relief you get from Government also counts towards your allowance, which means you could still be at risk of exceeding the £4,000 limit for the year.
How is the Money Purchase Annual Allowance triggered?
The MPAA can be triggered if:
- You are receiving taxable payments from a flexi-access drawdown plan
- You were in a flexible drawdown plan before 6 April 2015
- You’ve purchased a flexible lifetime annuity
- You’re receiving pension payments from overseas
These are just a few examples, so please speak with your financial adviser to find out if you could be at risk of triggering the MPAA. You won’t trigger the MPAA if you just take tax-free cash out of your pension.
If you have any concerns about the Money Purchase Annual Allowance or would like to discuss your options, your financial adviser is the best person to ask.