Updated 03 December 2020
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.
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.
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:
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.
It’s important to get a grip on the basic rules that govern MPAA. Here they are at a glance:
MPAA kicks in when you have accessed your pension benefits. Here are some of the scenarios that act as ‘trigger events’:
There are plenty of arrangements that don’t trigger MPAA.
Finally, MPAA only applies to contributions that you make to defined contribution pensions. It doesn’t affect defined benefit pension schemes.
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.
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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