Have you started flexible access to your money purchase or defined contribution pension? Then the MPAA rules apply to you. Here’s everything you need to know.
What is MPAA?
MPAA stands for the money purchase annual allowance.
Can you elaborate?
Here’s a more detailed explanation. Normally you get tax relief on pension contributions of up to £40,000 per year. However when you begin to take money from your defined contribution pension, the amount you can pay in to your pension tax-free reduces to £4,000. This £4,000 figure is what’s known as the money purchase annual allowance. It represents the maximum amount that you can pay in to your money purchase arrangements each year once you have flexibly accessed your pension.
The MPAA was introduced at the beginning of the 2015/2016 tax year. Its purpose is to prevent individuals abusing the pension system to avoid paying tax on their current earnings, or gaining two rounds of tax relief by withdrawing defined contribution savings and reinvesting them to their pension. It’s only when pension benefits have been flexibly accessed that the MPAA will apply.
Who does the MPAA apply to?
The MPAA only applies if you take money out of your pension in excess of the tax-free allowance (in one go or as regular income). Using your pension pot to buy a lifetime annuity or accessing your pension using the small pots rules does not trigger the MPAA.
What type of pensions does the MPAA apply to?
The MPAA only applies to defined contribution or money purchase pensions. That means you can still pay up to £40,000 tax-free into a defined benefit scheme. However if you have flexibly accessed your money purchase pension, you must take the MPAA into account with your defined benefits accrual. In essence that means your alternative annual allowance would be £36,000 (£40,000 minus the £4,000 MPAA) plus any carry forward from previous years.
Slightly different rules may apply according to the year you started flexibly accessing your pension. Please contact one of our expert advisers for clarity on your position.
What happens if you exceed the MPAA?
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 £4,000. This type of charge is usually paid via personal savings though you may be able to pay the charge directly from your pension scheme. You will also incur a charge if your defined benefit contributions exceed £36,000 (plus carry forward) in a single tax year.
Can you continue with your workplace pension?
If you have triggered the MPAA by flexibly accessing your pension, you will almost always be able to continue paying in to your workplace pension as normal. However you must be aware that your savings must not exceed £4,000 in a single tax year for defined contribution schemes, or £36,000 (plus carry forward) for defined benefit schemes.
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.