On 25 April 2017, the Government announced that some clauses in the Finance Bill 2017 would be dropped to allow time for the Bill to come into force before Parliament dissolves on 3 May. Included is the clause reducing the MPAA from £10,000 to £4,000. The Government has stated its intention to re-introduce the dropped clauses after the general election ( assuming the Conservative Government is re-elected).
At the moment it’s unclear whether the clause will be re-introduced with retrospective effect back to 6 April 2017, as originally intended, or whether the introduction of the reduction will be postponed until 6 April 2018. Until that’s clarified it’s safer to assume that the reduction to £4,000 will be re-introduced with an effective date of 6 April 2017: catch-up contributions can always be made if it turns out to be a later date.
The money purchase annual allowance (MPAA) is a reduced annual allowance that can apply to contributions to defined contribution (DC) schemes.
There is sometimes confusion around what triggers the MPAA. The following table covers what does and what doesn’t.
|Take PCLS only (Flexi-access drawdown)|
|Take PCLS and income (Flexi-access drawdown)|
|Remain in capped DD|
|Exceed GAD in capped DD|
|Take "small pot"|
When it was first introduced on 6 April 2015, the MPAA was set at £10,000. However this was reduced to £4,000 with effect from 6 April 2017.
The important point is that the £4,000 limit applies to all those who have triggered the MPAA, including those who triggered it when it was £10,000. So someone who envisaged being able to continue contributing up to £10,000 p.a. will now face a charge if contributions exceed £4,000.
This issue is compounded by the fact that you can’t carry forward unused annual allowance or MPAA from previous years to pay more than the MPAA.
Another issue is how it affects the alternative annual allowance (AAA) for defined benefit (DB) savers. The MPAA only applies to DC savings; savers with both DC and DB savings benefit from the full annual allowance of £40,000 of which up to £4,000 may be paid into DC plans, leaving an AAA of £36,000 that applies to their DB rights if the MPAA is exceeded. Before the MPAA was reduced, the AAA was £30,000 if the MPAA was exceeded.
Clients should consider very carefully before taking income for the first time after 6 April 2017 and would definitely benefit from taking financial advice before they do.
Senior Product Insight & Technical Support Analyst
Jim has worked in Financial Services since 1969 with experience in training, sales training, consultancy work and technical support.