What is Money Purchase Annual Allowance (MPAA)?

When looking at your pension and retirement options, there are many different ways you can access your pension pots and reinvest them. Because that involves large sums of money, the MPAA was introduced by the Taxation of Pensions Act 2014 ahead of the 2015 pension freedoms to prevent tax avoidance, so what is the money purchase annual allowance?

The money purchase annual allowance is the amount of contributions you get tax relief on after you’ve started drawing money from your defined contribution pension pot for 2021/2022 it’s £4,000.

Read on if you want to know how the MPAA works, why it might be triggered, and how to access your pension pots without triggering it.

How does the Money Purchase Annual Allowance Work?

The money purchase annual allowance comes into effect when you access more than tax free cash from your defined contribution pension savings. In effect, it stops you from paying into money purchase pensions, benefiting from tax relief, and then drawing the funds immediately tax free.

The thinking is, once you access a money purchase pension that could allow you to do this, the MPAA comes into effect and limits the amount of tax relief you can keep on future contributions.

Can I take pension benefits without triggering the MPAA?

Yes, you can access your pension benefits without triggering the MPAA. You can:

  • Receive income from an annuity
  • Receive income in capped drawdown (if you were in capped drawdown by 5th April 2015)
  • Take a pension commencement lump sum (PCLS taken tax free)
  • Payments from a beneficiary’s flexi-access drawdown fund

What happens if I trigger the Money Purchase Annual Allowance?

If you trigger the Money Purchase Annual Allowance, your pension provider will give you a ‘flexible access statement’ confirming the date you triggered the MPAA.

The MPAA comes into effect the day after your ‘trigger event.’ If you made contributions to schemes before that, they’re tested against the annual allowance. When you receive your ‘flexible access statement’ by law, you have to notify your other providers, and if you join a new scheme, you will need to inform them.

What is the difference between Money Purchase Annual Allowance And Annual Allowance?

The annual allowance is how the maximum amount you can contribute to your pension and receive tax-relief on (limited to your relevant pension earnings) in a tax year, currently set at £40,000 for 2021/2022. The MPAA, when triggered, is how much you are allowed to contribute to your defined contribution pension pots for the remainder of the tax year, currently £4,000 for 2021-2022.

What happens if I exceed the MPAA?

If you exceed the money purchase annual allowance, you’ll incur a tax charge. The amount you go over is added to your taxable income for that year, roughly equal to the tax relief you will have received.

There are two possible situations you could be in if you exceed the money purchase annual allowance. Because it’s an allowance within an allowance you could of:

  1. Exceeded the MPAA and the Annual Allowance or
  2. Exceeded the MPAA but not the Annual Allowance.

(If you exceeded the annual allowance without exceeding the MPAA, then that’s an ordinary annual allowance breach)

If you exceeded the MPAA but not the annual allowance, you would pay an annual allowance charge on the amount by which your money purchase contributions exceeded the MPAA. The charge is calculated in the same way as any other annual allowance charge. If you exceeded both, you’d need to work out two figures:

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

You’ll pay an annual allowance charge on the larger of the two amounts.

For example:

You are subject to the standard annual allowance of £40,000 and have triggered the MPAA. This year, you contributed £11,000 to your SIPP (a money purchase pension) and had £32,000 worth of savings to other types of pension.

Your total savings have exceeded the annual allowance and the money purchase contributions exceed the MPAA, so you need to work out both figures:

  1. Your total pension savings of £43,000 exceed the annual allowance by £3,000.
  2. Your money purchase contributions have exceeded the MPAA by £7,000. Your other pension savings have not exceeded the alternative annual allowance of £36,000 (£40,000 annual allowance – £4,000 MPAA). Therefore, the total figure is £7,000.

You’ll pay an annual allowance charge on the larger figure (£7,000).

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