COVID-19 and the money purchase annual allowance (MPAA)

23 June 2020

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Jim Grant, our Senior Technical Support Analyst, looks at what triggers the MPAA and further calls for it to be abolished due to the COVID-19 pandemic.

The money purchase annual allowance (MPAA) was introduced along with pension freedoms on 6 April 2015.

The aim of the MPAA is to limit the scope for those over 55 to make pension withdrawals and recycle them back into a pension plan in the form of pension contributions, securing double tax relief.

Anyone subject to the MPAA has a specific annual allowance in respect of their money purchase pension savings. This started off at £10,000 and reduced to £4,000 from 6 April 2017. Once triggered it can’t be un-triggered and carry forward of unused MPAA from previous years isn’t possible.

Various actions by the member triggers the MPAA, the most common of which are:

  • taking income from a flexi access drawdown plan
  • taking income greater than the max GAD from a capped drawdown plan
  • taking an uncrystallised funds pension lump sum (UFPLS).

Of course, many people are under financial strain during the current COVID-19 crisis and may be tempted to access funds from their pension plan either to ease their own financial situation or that of a relative. They may not understand the consequences of doing so. This could trigger the MPAA and reduce their ability to re-build their funds later.

Calls to abolish the MPAA

Many in the pensions industry felt that the MPAA was too draconian a limit, even before COVID-19 hit us.

The Office of Tax Simplification identified the issue in its October 2019 report on the Taxation of Life Events saying that the effect of the rules goes beyond the policy objective of preventing recycling and recommended that:  

‘The government should review the operation of the Money Purchase Annual Allowance, gathering better evidence, considering whether it meets its policy objectives, is set at the right level and is sufficiently understood, given the present potential for disproportionate outcomes’.

This was echoed in the ABI’s 2020 paper Five years on:  Future-proofing the freedoms.

There have been further calls in the trade press for it to be abolished, suspended or put back to £10,000 because of the circumstances many people currently find themselves in. 

So, who knows? Far stranger things have happened recently!

About the author

Jim Grant

Senior Technical Support Analyst

Jim has worked in Financial Services since 1969 with experience in training, sales training, consultancy work and technical support.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.