Pensions come with a number of great benefits, but alongside them are many different rules, exceptions and allowances which can make it challenging when looking at retirement planning. The money purchase annual allowance can add to the complexities, but it is important that you know what it is and how it could impact upon your pension.
What is the MPAA?
The money purchase annual allowance is a reduction on a pension member’s annual allowance down to £4,000 per annum, should they access their pension benefits flexibly. It was introduced in 2014 under the Taxation and Pension Act 2014 along with the other pension freedoms introduced in April 2015. The allowance was £10,000 per annum from 2015 to 2017, but was reduced to the current level of £4,000 in 2018.
It was brought in to prevent pension policy holders over the age of 55 placing their entire salary into a pension via salary sacrifice then immediately drawing it out as pension income, thus avoiding National Insurance and not paying tax on 25% of their earnings.
What triggers the MPAA?
There are eight trigger events for the money purchase annual allowance which include:
- Drawing an income from a flexi-access drawdown pension
- Receiving an income from a flexible annuity
- Drawing a lump sum via uncrystallised funds pension lump sum
- Converting capped drawdown to flexi-access drawdown and then taking an income
- Drawing out more than the maximum permitted income from a capped drawdown plan
- If you were a member of a flexible drawdown plan prior to April 2015
- Receiving a stand-alone lump sum where the member has primary protection and the lump sum rights on 6 April 2006 was greater than £375,000
- Receiving a scheme pension income (a defined benefit) which has less than 12 members.
What types of pension is the MPAA applicable to?
As the name suggests, the money purchase annual allowance has an impact on money purchase pension contributions.
You can still accrue benefits in a defined benefit pension and you can have both an active defined benefit pension as well as a money purchase pension. The allowance for the money purchase pension will, however, be limited to £4,000.
It should also be noted that employer pension contributions count towards the allowance of a money purchase pension scheme.
What happens if I exceed the MPAA?
Exceeding the money purchase annual allowance will result in an annual allowance charge that is equivalent to the amount of tax rebate received from the contribution. Therefore, if you are a higher-rate tax payer, the charge will be 40%. Additionally, you cannot use carry forward unless it’s for a defined benefit scheme.
How Tilney can help
Tax rates and reliefs depend on your individual circumstances and are subject to change so getting advice can be important.
If you think you might be affected by the money purchase annual allowance or you would like some more information, Tilney’s financial planners can help. They are on hand to assist with all aspects of your retirement planning, along with cutting through all the jargon that inevitably comes with pensions! To find out more, book a free consultation online or call us on 020 7189 2400.
Issued by Tilney Financial Planning Ltd.
This article was previously published on Tilney prior to the launch of Evelyn Partners.