The MPAA will apply once an individual first flexibly accesses a money purchase arrangement in certain circumstances on or after 6 April 2015 (known as a trigger event). This basically restricts the level of tax relievable contributions that can be made to a money purchase plan to £4,000 each tax year from 6 April 2017 (previously £10,000 from 6 April 2015).
Once benefits have been flexibly accessed from a money purchase arrangement, the MPAA will apply to all post trigger event defined contribution inputs in that tax year and in future tax years.
So what are the trigger events?
Any of the following will trigger the MPAA:
- Taking an income payment from a flexi-access drawdown fund
- Taking an income from capped drawdown (in excess of the cap)
- Those who were in a flexible drawdown plan before 6 April 2015
- Taking an Uncrystallised Funds Pension Lump Sum (UFPLS)
- Taking a stand alone lump sum (primary protection and protected tax-free lump sum rights greater than £375,000)*
- Taking out a flexible lifetime annuity
- Taking a scheme pension from schemes with less than 12 pensioners
- Any payments from an overseas pension scheme that have received UK tax relief and offer similar options as above.
* Does not apply to stand alone lump sums under a defined benefit arrangement.
What is a default or alternative chargeable amount?
In order to determine whether a charge applies the individual’s total pension inputs are tested against both the default chargeable amount and the alternative chargeable amount.
Why are there two tests?
The annual allowance and the MPAA can both apply, which is why there are two tests to determine 1) whether a chargeable amount applies and 2) what that chargeable amount is.
How does it work?
Where benefits have been flexibly accessed through one of the trigger events, the MPAA reduces the annual allowance for pension inputs into DC schemes to £4,000. However, the individual still retains an alternative annual allowance in relation to any DC contributions made in that tax year but before the trigger event, and also for any DB pension accrual. The alternative annual allowance is £36,000, where the full £4,000 MPAA has been used up.
There are two calculations to determine whether or not there is a chargeable amount that a charge will apply to. If the calculation produces a negative figure then it is treated as zero, as it is not possible to have a negative chargeable amount. These calculations are summarised below:
The best way to illustrate this is with an example.
Example – Emma
In the 2018/19 tax year, Emma used up £25,000 of the annual allowance through accruing benefits within a DB scheme. She had also contributed £10,000 into her DC scheme before flexibly accessing some of her benefits, which resulted in a trigger event. After this trigger event she then contributed a further £5,000 into her DC scheme.
Is there a chargeable amount and if so, which, the default or alternative?
Does carry forward of unused allowances apply?
One important rule to note is that individuals can’t use carry forward of unused allowances against the MPAA, however it can be used against the alternative annual allowance.
What happens if the tapered annual allowance also applies?
Where an individual is subject to both the tapered annual allowance and the MPAA, then their allowance can be determined as follows:
- The tapered annual allowance will be their actual annual allowance, although the MPAA will still apply to the level of contributions that can be made to a DC scheme
- To determine how much will apply to the MPAA and how much to the alternative annual allowance -
– First minus the MPAA from the available tapered annual allowance
– Whatever remains is the available alternative annual allowance; if nothing remains then the alternative annual allowance is nil.
So for example, if an individual’s tapered annual allowance is £15,000, you would deduct the MPAA of £4,000 from £15,000, leaving £11,000 available as the alternative annual allowance.
Can individuals take an income while continuing to contribute to a DC scheme?
You may have clients looking to access pension funds in order to top up their income and remain an active member of their workplace pension scheme. So is there a way for these individuals to still contribute to a DC scheme in excess of £4,000 without causing a trigger event and being subject to the MPAA?
Individuals may be able to take advantage of one or more of the following options:
- Increase income within the capped drawdown limits (where the member has a capped drawdown plan)
- Use ‘small pots’ rules to take up to £30,000 (to a maximum £10,000 from three separate arrangements)
- Access only tax-free cash from partial or full drawdown
- Use phased drawdown to provide a tax-free only source of income
- Take out a guaranteed lifetime annuity
- Use other non-pension assets to provide capital/income
- Taking income from a disqualifying credit.
As part of efficient retirement planning it’s important to know how the annual allowance and MPAA operate, the limits that apply and in what circumstances any carry forward can be used.
Equally important is being able to generate income or capital without flexibly accessing benefits and causing a trigger event, in particular for those individuals who are either currently contributing or planning to contribute to a DC scheme in the future. Any employer contributions into a DC scheme would also count towards the MPAA.
Where an individual also has DB benefits there is the alternative annual allowance to take into consideration or the tapered annual allowance for those with high adjusted income. So even where the MPAA does come into play, there are other hurdles which individuals need to be aware of.
If you’ve got clients looking for income but still contributing in excess of £4,000 into a money purchase scheme, possible options may include:
- Taking income within the capped drawdown (where clients have existing capped drawdown plans);
- Using the small pot rules to take up to £30,000 (max £10,000 from three separate arrangements);
- Only using tax-free cash;
- Taking out a guaranteed lifetime annuity;
- Taking income from a disqualifying credit (where this applies).
For more information, please contact your dedicated account manager.
Sam Newton, Technical Manager
Sam is a pension and investment specialist with over 17 years industry experience working for life and pension providers and asset managers, financial advisory firms and the regulator. He holds the Diploma in Financial Planning with the CII. He has held various technical and policy roles within the industry.