The Money Purchase Annual Allowancve

Table of Contents

What is the Money Purchase Annual Allowance?

The Money Purchase Annual Allowance (MPAA) was introduced to stop people from taking money out of their pension, and then recycling the same money back into their pension to benefit from the upfront tax relief. 

The MPAA test applies when an individual first flexibly accesses a money purchase arrangement in certain circumstances on or after 6 April 2015.

When looking at the rates for the MPAA they are as follows:

• For tax year 2016-17 only, they mean £10,000
• For 2017-18 to 2022-23 they mean £4,000. 
• For 2023-24 onwards, they mean £10,000.

A ‘trigger event’ determines when the individual first flexibly accesses a money purchase arrangement.

If a trigger event occurs, the money purchase annual allowance test will apply for the tax year in which the event occurs and in subsequent tax years.

If an individual has a member’s flexi-access drawdown fund that came into effect as a result of:

• funds being designated on or after 6 April 2015 as available to provide drawdown pension, or;
• funds in a pre-6 April 2015 member drawdown pension fund being transferred to another pension scheme and, as part of the transfer, being re-designated as a member flexi-access drawdown fund in the receiving scheme.

Trigger Events:

A trigger event occurs immediately before the first payment is made from that member’s flexi-access drawdown fund, this can be from:

• Qualifying for flexible drawdown before 6 April 2015.
• Uncrystallised funds pension lump sums.
• Income from a flexibly accessed pension plan.
• When a stand-alone lump sum is paid to the individual when the individual has primary protection and a protected tax-free lump sum right which is greater than £375,000.
• When a lifetime annuity is purchased that can reduce in amount.
• Scheme pensions from pension schemes with less than twelve pensioners.

Note - a trigger event does not occur if, at the time of a payment from the member’s flexi-access drawdown fund, the whole of the fund is attributable to a disqualifying pension credit.

Events that don’t trigger the MPAA:

The money purchase annual allowance will not apply if one of the following events occur:

• Payment of a pension commencement lump sum. 
• Payment of a trivial commutation lump sum. 
• Payment of funds from a money purchase arrangement as a ‘small lump sum’.
• Entitlement to a scheme pension under a money purchase arrangement where at least 11 other individuals are receiving a scheme pension or dependants’ scheme pension.
• Entitlement to a lifetime annuity that cannot decrease in amount except in prescribed circumstances. 
• From 6 April 2015, no more than the permitted maximum for capped drawdown continues to be paid from a pre-6 April 2015 drawdown pension fund. 
• Payments from a beneficiary’s flexi-access drawdown fund.

Notifying parties when the MPAA is triggered: 

Where an individual has flexibly accessed their benefits under a scheme, they'll receive a flexible access statement. 

They must notify schemes, where they're still actively accruing benefits, that they've flexibly accessed their benefits. This can be done by sending a copy of the statement.

Policy holders must, within, 13 weeks:

• give the scheme administrator or scheme manager a copy of the flexible access statement; or
• tell the scheme administrator or scheme manager they have received a flexible access statement, and either the date of the relevant event or, where applicable, that the relevant event occurred more than two years before the start of the relevant 13-week period.

In addition, if they become a member of another registered pension scheme after the start of their 13-week notification period, then within 91 days beginning with the date they became an accruing member, they must also tell that scheme they've flexibly access their benefits.

What happens if I exceed the MPAA?

Because the MPAA is an allowance within an allowance, there are two possible scenarios if you have breached the MPAA:

1. You exceeded the MPAA but didn’t exceed the annual allowance.
2. You exceeded both the MPAA and the annual allowance.

If the member exceeds the MPAA but not the annual allowance, they will pay an annual allowance charge on the amount by which they exceeded the MPAA. The charge is calculated in the same way as any other annual allowance charge.

Unlike the normal Annual Allowance, the member can’t carry forward any unused MPAA from previous years.

If they exceeded both, you’ll need to work out two figures:

1. The amount by which the total savings exceeded the annual allowance.
2. The amount by which the money purchase contributions exceeded the MPAA, plus the amount by which other savings exceeded the ‘alternative annual allowance’ (i.e. the annual allowance minus the MPAA).

They will pay an annual allowance charge on the larger of the two amounts.

What happens if you exceed the MPAA?

If the member contributes more than the MPAA an annual allowance tax charge is applicable on the difference between the amount saved and £10,000. 

The tax charge payable on the excess is broadly equivalent to the amount of tax relief reclaimed as the charge is linked to the members rate of income tax. 

The charge must be declared to HMRC on the member’s self-assessment return.

Note: It is the members responsibility to check if the MPAA applies and to tell HMRC if this is the case.

If they contribute more than the MPAA into their pension and a tax charge is due, they must tell HMRC and arrange to pay the charge. In addition, they must also notify any other money purchase pension schemes they belong to that they have triggered the MPAA. 

Please see the article on scheme pays if you feel the scheme can pay the charge on behalf of the member.

The member could be fined by HMRC if they don’t do this.