The Money Purchase Annual Allowance (MPAA) rules were introduced in April 2015 and were aimed at stopping recycling the 25% tax-free lump sum via further pension contributions with tax relief.
What are the rules?
If an individual triggers the MPAA rules, then they have a £10,000 AA for money purchase pension savings. Depending on whether or not they exceed this £10,000 they will either have a reduced £30,000 AA or retain the normal £40,000 AA.
If they trigger the rules and exceed the £10,000 MPAA in any tax year:
- they will be subject to the AA charge on the excess over £10,000; and
- their AA for the remainder of their pension savings is reduced to £30,000 (the 'alternative annual allowance') plus any unused AA they may carry forward from the three previous tax years. To ensure that the same savings are not subject to the AA twice, any pension savings tested against the £10,000 MPAA will not be tested against the reduced £30,000 AA.
If they do not exceed the £10,000 MPAA:
- their total AA, including for money purchase and defined benefit arrangements, will continue to be £40,000 plus any unused AA carried forward from the three previous tax years; and
- they will not be able to carry forward any unused MPAA.
What will trigger the rules?
The rules apply to an individual if one of the following occurs in a tax year, on or after 6 April 2015:
- they drawdown funds from a flexi-access drawdown fund, including receiving payments from a short-term annuity provided from a flexi-access drawdown fund;
- they receive an uncrystallised funds pension lump sum;
- they notify the scheme administrator that they wish to convert their pre-6 April 2015 drawdown pension fund to a flexi-access drawdown fund and they subsequently take a drawdown pension from that fund;
- they take more than the permitted maximum for capped drawdown from a pre-6 April 2015 drawdown pension fund;
- they receive a stand-alone lump sum and are not entitled to enhanced protection;
- they receive a payment from a lifetime annuity where the annual rate of payment can be decreased other than in permitted circumstances; or
- they receive a payment of a scheme pension from a money purchase arrangement where the arrangement is providing scheme pensions to less than 12 members, including dependant's, at the time the first payment is made.
The rules will not apply if one of the following occurs:
- an individual receives a PCLS, trivial commutation or small pots lump sum;
- an individual is in receipt of a scheme pension from a defined benefits arrangement or from a money purchase arrangement where at least 12 people are receiving a scheme pension;
- an individual is in receipt of a lifetime annuity that can't go down except in prescribed circumstances; or
- after 6 April 2015, an individual takes no more than the permitted maximum for capped drawdown from a pre-6 April 2015 drawdown pension fund.
The Government propose to reduce the MPAA to £4,000 from April 2017. This change, couple with the tapered Annual Allowance for those with 'adjusted income' over £150,000, means that there is no substitute for good financial advice. It may be worth mentioning to your clients that the world of pensions continues to evolve and is unlikely to be straight-forward.