What is the Money Purchase Annual Allowance (MPAA)?
Updated 03 December 2020
4min read
The Money Purchase Annual Allowance (MPAA) is a special restriction on the amount you can pay in to your pension and still receive tax relief. It kicks in when you start to access your pension pot for the first time. Read on to find out more about what it is, how it works and why you need to know about it before you touch your pension.
What is the Money Purchase Annual Allowance?
The MPAA replaces your annual allowance after you’ve started to draw your pension pot(s). Everyone has an annual allowance which restricts how much you can pay into your pension pot each year. But once you’ve started to draw your pension (with a few exceptions), this annual allowance is replaced by the MPAA, which is only 1/10th as big.
The MPAA was originally set at £10,000 but it’s been reduced and is currently £4,000. It was created to stop people from trying to avoid tax on current earnings or gain tax relief twice, by withdrawing pension savings and then paying them straight back in again.
How does the Money Purchase Annual Allowance work?
The MPAA is applied in different ways, depending on the tax year. In the first tax year in which you draw your pension, MPAA is applied only to contributions you make into your pension pot after the date it has been triggered. In every tax year after that, all contributions will be covered by the MPAA.
Here’s an example of how it works in your first tax year:
- It’s the tax year 2019/20. Jill pays a monthly contribution of £1,000 into her pension on the first of each month.
- On 1 November 2019, Jill takes a taxable lump sum (called a UFPLS) from her pension. This is the ‘trigger event’ that causes the MPAA to kick in.
- All the contributions that Jill has paid up to November are measured against her standard annual allowance of £40,000. These only total £7,000 so she is well within this limit.
- Jill continues to work and pay into her pension. But all the contributions that she pays in after the trigger date are measured against the MPAA of £4,000. If she carries on paying in £1,000 per month until 1 April, she’ll pay in another £5,000 – which will exceed the MPAA.
- Jill now faces an additional tax charge on the excess contribution.
In every year that follows, if Jill continues to pay in £12,000 a year then this will exceed the MPAA by £8,000 – resulting in an even bigger tax charge. Jill should seek advice as to whether a pension is still the best place to pay her excess income.
What are the Money Purchase Annual Allowance rules?
It’s important to get a grip on the basic rules that govern MPAA. Here they are at a glance:
- MPAA sets a lower annual allowance for pension contributions once you start to access your pension
- The scheme doesn’t replace the current annual allowance rules or reduce the annual allowance as it currently stands
- There are a number of ‘events’ that trigger MPAA, which are outlined below
- When MPAA has been triggered, there are notification requirements
What ‘Accessing Flexibility Events’ trigger MPAA?
MPAA kicks in when you have accessed your pension benefits. Here are some of the scenarios that act as ‘trigger events’:
- You take your whole pension pot in the form of a lump sum
- You take a series of taxable lump sums (UFPLS) from your pension pot
- You use your pension to set up a drawdown scheme and start to take income from it
- You have a capped drawdown plan (a type of scheme from before April 2015) and exceed the cap on your income
- You buy a flexible or investment linked annuity that could see your income go down
How can you avoid triggering MPAA?
There are plenty of arrangements that don’t trigger MPAA.
- You take a tax-free lump sum and buy an annuity that gives you a guaranteed minimum income
- You take a tax-free lump sum from your pension pot and set up a drawdown scheme but don’t yet take any income from the drawdown scheme
- You cash in pension pots with a value of less than £10,000.
Finally, MPAA only applies to contributions that you make to defined contribution pensions. It doesn’t affect defined benefit pension schemes.
What are the fines for not complying with the Money Purchase Annual Allowance?
If your trigger the MPAA then your scheme administrator will let you know. However, it is your responsibility to provide relevant information about the situation to any other pension provider with whom you are saving into a pension pot, within 91 days. If you fail to follow these rules, you could be liable to a £300 fine, followed by daily extra penalties of £60 if the situation remains unresolved.
Talk to your IFA about the potential pitfalls of non-compliance with MPAA. They will be able to help you steer clear of unwelcome fines.
How can an IFA or accountant help?
MPAA has created a complicated environment, where it’s all too easy to find yourself facing an unexpected tax liability or even fines. As retirement patterns and future plans change, it’s really important to be fully aware of the rules, regulations, and evolving schemes that affect your pension status, flexibility and future health.
To navigate MPAA successfully and make use of your pension pot in a way that suits your lifestyle and status, consult your IFA or accountant.
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