A review of how and when the MPAA applies, what the trigger events are and the opportunities to plan around them.
- The Money Purchase Annual Allowance (MPAA) is currently set at £4,000 each tax year from 6 April 2017, (previously £10,000 from 6 April 2015)
- There are various trigger events, which will result in the MPAA applying, when flexibly accessing benefits
- Carry forward of unused allowances cannot be used towards the MPAA, however it can still be used towards the alternative annual allowance, where this applies
- Where contributions are paid in excess of the MPAA, there are two tests, known as the ‘default’ and ‘alternative’ tests to determine what the chargeable amount is, if any. The higher of the two amounts will have the excess charge applied to it.
What is the Money Purchase Annual Allowance?
The money purchase annual allowance (MPAA):
- Applies when an individual first flexibly accesses a money purchase arrangement in certain circumstances (see below) on or after 6 April 2015 (known as a trigger event).
- 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).
A trigger event:
- Occurs when the individual first flexibly accesses a money purchase arrangement.
- Will result in the MPAA applying to all post trigger event defined contribution inputs in that tax year (and future tax years).
What are the trigger events?
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 Pensions Lump Sum (UFPLS)
- Those taking a stand alone lump sum (primary protection and protected tax-free cash lump sum rights greater than £375,000)*
- Those taking out a flexible lifetime annuity
- Scheme pensions from schemes with less than 12 pensioners
- Payments from overseas pension schemes (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
Why are there default and alternative tests?
To determine whether or not either the Annual allowance or MPAA has been Exceeded, there are two tests applied.
These two tests are known as:
- Default chargeable amount; and
- Alternative chargeable amount
Why are there two tests?
The annual allowance and money purchase annual allowance can both apply, which is why there are two tests
- Whether a chargeable amount applies; and
- 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.
Individuals still retain an alternative annual allowance in relation to any DC contributions made (in that tax year) before the trigger event and for any Defined Benefit (DB) 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. The higher of the two calculations will determine the amount (if any) that the charge will be applied to.
If any of the results produces a negative figure then treat it as zero, as it is not possible to have a negative charge.
Example - Julia
- Julia has used up £25,000 of the annual allowance through accruing benefits within a defined benefit
(DB) scheme; and
- She has contributed £5,000 into a Defined Contribution (DC) scheme, since flexibly accessing benefits.
- She also contributed £10,000 to her DC scheme prior to the trigger event within the tax year.
Looking at the two calculations, we can see that the alternative chargeable amount provides the higher figure. Therefore, this will be the chargeable amount that applies. This is added to her income and charged at her marginal tax rate.
Does carry forward of unused allowances apply?
Individuals cannot use carry forward of unused allowances towards 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 money purchase annual allowance, 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 defined contribution scheme.
To determine how much applies 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
For example, if an individual’s tapered annual allowance is £15,000, you would deduct the MPAA of £4,000, leaving £11,000 available as the alternative annual allowance.
Clients that do not want to trigger the MPAA but require an income may be able to:
- Increase income within the capped drawdown limits (where the member has a capped drawdown plan)
- Use small pots rules to take up to £10,000 (maximum £10,000 from three separate arrangements for non-occupational schemes)
- 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 (where applicable)
This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at March 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.