Money Purchase Annual Allowance (MPAA) – CII AF3, R04, J05
In this third post in our series on pension decumulation rule changes effective from 6 April 2015 and examinable from 1 September 2015, we will be looking at the Money Purchase Annual Allowance (MPAA). Those sitting the CII AF3, R04, or J05 exams should find this post particularly useful in their revision.
In our last two articles on the pension decumulation rule changes that came into force from 6 April 2015, we took a look at the new flexi-access drawdown and uncrystallised funds pension lump sum (UFPLS) retirement options.
MPAA is prevention against misuse of pension flexibility
One of the Government’s concerns about allowing this increased pension flexibility at retirement was the potential scope to use it as a highly tax-efficient means of remuneration. To prevent this, from 6 April 2015 a new money purchase annual allowance (MPAA) of £10,000 will be triggered for all future contributions to money purchase schemes if an UFPLS is taken or funds are newly designated into flexi-access drawdown and income is actually drawn from the crystallised fund. Taking the tax-free PCLS and no income under flexi-access drawdown will not immediately trigger the MPAA.
Triggering the MPAA Rules
There are other scenarios that will also trigger the MPAA rules such as converting a pre-6 April 2015 capped drawdown fund to a flexi-access drawdown fund and then subsequently taking a drawdown pension from that fund, but these are the main ones.
Under the new rules the standard £40,000 annual allowance applies to those who make contributions to both money purchase and defined benefit schemes. If contributions into money purchase schemes do not exceed £10,000, the person will retain a total annual allowance of £40,000 for contributions into money purchase and defined-benefit arrangements combined. It is possible to carry forward any unused annual allowance from the three previous tax years, however, while this will increase the available overall annual allowance, it is never possible to have an MPAA of more than £10,000.
If money purchase contributions exceed £10,000, then the excess contribution (over £10,000) will be subject to an annual allowance charge, and the annual allowance for any non-money purchase arrangements will be set at £30,000 (called the alternative annual allowance). In this instance, while it is possible to carry forward unused annual allowance from the three previous tax years to increase the alternative annual allowance available, it is once again not possible to use carry forward to increase the MPAA.
Some Good News…
While this is complex (and this is only the tip of the iceberg!), there are two pieces of good news. Firstly, converting from flexible drawdown into flexi-access drawdown from 6 April 2015 has created a new opportunity to make contributions of up to £10,000 a year under the money purchase annual allowance (MPAA) provision without triggering an annual allowance charge, whereas pre-6 April under flexible drawdown the annual allowance was set to zero. Secondly, the Government has indicated that only 2% of the people contributing to money purchase pensions are likely to be paying in excess of £10,000.
The Bad News…
The bad news is that from a CII pensions related exams perspective there is a very high probability of being tested on the MPAA.
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Over to You…
What do you think of the new pension decumulation rule changes? Are these new rules going to pose a challenge for you in your upcoming exam? We’d love to hear from you!