The Money Purchase Annual Allowance (MPAA) was introduced by the Taxation of Pensions Act 2014, on the 6th April 2015. It is designed to discourage individuals who seek to abuse the new flexible pension rules to avoid tax and potentially National Insurance Contributions by introducing a lower alternative annual allowance where flexibility has been accessed.
If you have taken some income from your flexi-access drawdown plan or withdrawn an Uncrystallised Funds Pension Lump Sum under a different arrangement you will be subject to the £4,000 money purchase annual allowance (MPAA).
When you first flexibly access your pension, the scheme administrator has to provide a statement to you within 31 days. You must then notify any other schemes that you are an active member of (i.e. where contributions are being paid to a money purchase scheme or you are accruing benefits under a cash balance or hybrid scheme) within 91 days of receiving their statement, so that they’re also aware that the £4,000 MPAA will apply. The MPAA does not replace the current Annual Allowance rules (or reduce the normal annual allowance). In the post April 2015 world, the Annual Allowance will be the primary allowance to consider, however, when a trigger event happens the new MPAA rules will also apply.
When both rules apply, a comparison is required of the:
- default chargeable amount, the chargeable amount under the current rules; and
- alternative chargeable amount, the chargeable amount under the new rules. The higher of the two figures is used .
The Money Purchase Annual Allowance (MPAA) will apply from when pensions flexibility has been accessed, however, it will only be of consequence where total contributions to a money purchase arrangement in a Pension Input Period exceed £4,000.
Accessing flexibility is referred to as a ‘trigger event’ and means:
- Uncrystallised Fund Pension Lump Sum (UFPLS)
Where a member accesses their pension fund via an UFPLS this is regarded as a trigger event and the new MPAA rules will apply.
- Flexi-access Drawdown Income
A designation of funds for flexi-access drawdown does not in itself trigger the MPAA, nor does the payment of a PCLS. However, once income (or any lump sums from the designated pot) are taken from the funds designated to a flexi-access drawdown plan, the MPAA will apply (see also Accessing Benefits without Triggering the MPAA below). However, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit* then the MPAA will not be triggered.
*disqualifying pension credits are pension credits from divorce pension splitting orders where the benefits were already in payment at the time of the splitting order.
- Capped Drawdown Income Above Cap
Those clients in “capped drawdown” on 5th April 2015 may continue in capped drawdown. The current system for calculating and reviewing the cap is expected to remain in place. If the member then chooses to take an income in excess of their cap the MPAA will apply. This will be subject to the scheme allowing a payment in excess of the cap to be paid.
- Existing Flexible Drawdown
Where clients had flexible drawdown funds immediately before 6 April 2015, they were treated as having accessed flexibility on 6 April 2015 as their drawdown became flexi-access on this date.
- Stand Alone Lump
In some circumstances where a stand alone lump sum is paid out from 6th April 2015 the MPAA will also apply (Primary Protection and lump sum rights at A-day in excess of £375,000).
- Flexible Annuity
Where entitlement to an annuity occurred on or after 6 April 2015 and it varies in ways that are not currently permitted by SI2006/568 will count as having accessed flexibility and the MPAA will be triggered. This is detailed in The Registered Pension Schemes (Prescribed Manner of Determining Amount of Annuities) Regulations 2006).
- Scheme Pension with less than 12 members
Where a client is entitled to scheme pension from a money purchase arrangement after 6 April 2015 this will trigger the MPAA unless there are 12 or more members.