Learning About the Money Purchase Annual Allowance (MPAA)
In this third post in our series on pension decumulation, we will be looking at the Money Purchase Annual Allowance (MPAA). Those sitting the CII R04, AF7, or J05 exams should find this post particularly useful in their revision.
MPAA is prevention against misuse of pension flexibility
One of the Government’s concerns about allowing increased pension flexibility at retirement in 2015 was the potential scope to use it as a highly tax-efficient means of remuneration by diverting salary into the pension with tax relief and immediately withdrawing it with 25% tax-free. To prevent this, the money purchase annual allowance (MPAA) was introduced to restrict future money purchase contributions when pensions flexibility has been accessed. Initially, the MPAA was set at £10,000 but was reduced to £4,000 in 2017
Annual Allowance and the MPAA
If the MPAA is triggered, the standard £40,000 annual allowance still apples to total pension input i.e. to those who make contributions to both money purchase and defined benefit schemes. So, if money purchase contributions do not exceed £4,000, 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 £4,000.
If money purchase contributions exceed £4,000, then the excess contribution (over £4,000) will be subject to an annual allowance charge, and the annual allowance for any non-money purchase arrangements will be set at £36,000 (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. You should note that where the tapered annual allowance applies the alternative annual allowance will be less in that tax year.
The following events trigger the MPAA and once triggered the MPAA will apply to all subsequent money purchase pension input:
- Accessing a pension fund via uncrystallised funds pension lump sum
- Drawing any income from a flexi-access drawdown fund. Note: taking the tax-free PCLS and no income under flexi-access drawdown will not immediately trigger the MPAA
- Converting a capped drawdown fund to flexi-access drawdown and taking an income from that fund or taking more than the maximum allowable income from a capped drawdown fund
- Receiving a standalone lump sum when entitled to primary protection with protected lump sum rights in excess of £375,000
- Receiving income from a flexible annuity that can decrease except in certain prescribed circumstances
- Receiving a scheme pension directly from money purchase funds which is paying to fewer than 11 other members
Individuals who had a pre-April 2016 flexible drawdown arrangement were treated as having accessed flexibility on 6 April 2015.The third article in a series on pension decumulation - this one's about the Money Purchase Annual Allowance (MPAA). Click To Tweet
Some Good News…
While this is complex (and this article is only the tip of the iceberg!), there was some good news. Converting from flexible drawdown into flexi-access drawdown from 6 April 2015 did create an opportunity to make contributions of up to £4,000 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.
The Bad News…
The bad news is that from a CII pension-related exams perspective, there is a very high probability of being tested on the MPAA.
Test yourself and have a go at one of our mock questions relating to the MPAA:
Which of the following would be seen as an advantage of drawing benefits by way of phased retirement through capped drawdown pension rather than through a flexi-access drawdown plan?
- Full pension commencement lump sum at outset
- Funds can be used to provide unlimited withdrawal amounts
- It will not usually trigger the money purchase annual allowance rules
- Mortality drag
The answer is below.
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Answer C: Phased capped drawdown will not trigger the money purchase annual allowance rules as long as income stays within the capped limits.