MPAA triggers – what are they?

05/03/2020

Triggering the MPAA will mean you can only save £4,000 tax-free into your defined contribution pension scheme each year – rather than £40,000. Here’s a rundown of the MPAA triggers.

What is the MPAA?

MPAA stands for the money purchase annual allowance. It refers to the tax-free amount you can save annually into your money purchase – or defined contribution – pension once you have triggered certain conditions. The MPAA was introduced at the beginning of the 2015/2016 tax year to prevent savers avoiding tax on their current earnings, or gaining two rounds of tax relief by manipulating their defined contribution pension scheme.

READ MORE: >> What is the MPAA?

What are the MPAA triggers?

There’s a lot of confusion about which actions trigger the MPAA. In general terms the MPAA is only triggered when you have flexibly accessed your defined contribution pension pot. There are a number of different actions (known as trigger events) that will subject you to the MPAA rules.

These include:

  • If you take your entire pension pot as a lump sum or start to withdraw taxable ad-hoc lump sums
  • If you put your pension savings into a flexi-access drawdown scheme and start to take an income
  • If you buy an investment-linked or flexible annuity where your income could go down as well as up
  • If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap.

The MPAA won’t normally be triggered if:

  • You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed lifetime income (one that either stays level or increases)
  • You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
  • You withdraw small pension pots valued at less than £10,000.

How do you know if you have triggered the MPAA?

If you have triggered the MPAA, your pension provider will give you a formal notification of the implications within 31 days of the trigger date. This notification is called a flexible access statement. You are then required to pass on this information to the providers of any other money purchase or defined contribution pension schemes that you are part of – within 91 days.

How does MPAA affect your pension contributions?

Once you have triggered the MPAA, you can only save £4,000 tax-free into your defined contribution pension scheme each year – rather than £40,000. However you can still pay up to £36,000 (£40,000 minus the £4,000 MPAA) plus any carry forward, tax-free, into a defined benefit scheme. Going over the MPAA – paying more than £4,000 into your defined contribution pension in a single tax year – will incur a tax charge on the contributions above the £4,000 threshold.

What if you have an overseas pension?

Any of the trigger events listed above that have benefited from UK tax relief will also subject you to the MPAA rules.

Need some advice?

Prydis are experts in retirement planning and wealth management. If you would like to talk about MPAA, please get in touch. It won’t cost a penny to have an introductory conversation.

Nothing in this article construes, or is intended to construe, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of pension planning, to ensure any recommendations made will be suitable for your needs and circumstances.

James Priday

This article was written by James Priday

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