What happens when you trigger the money purchase annual allowance mid-year?
Meera is a member of a defined benefit scheme. The pension input amount for that scheme in 2024/25 is likely to be £25,000.
She also has a personal pension plan to which she pays £2,000 a month on the tenth day of every month.
On 1 August 2024 she partially crystallises her personal pension, enters flexi-access drawdown and makes a withdrawal. This triggers the £10,000 money purchase annual allowance from that date.
Up to that point she had paid £8,000 in the current tax year to her personal pension (April to July). This doesn’t result in an annual allowance charge as she hadn’t triggered the money purchase annual allowance at that point. However, if she continues to pay £2,000 a month to her personal pension, she’ll pay £16,000 over the rest of the tax year (August to March). This will result in a tax charge on the £14,000 excess over the money purchase annual allowance. To avoid an annual allowance charge, Meera will have to reduce her personal pension plan contributions to £250 a month.
In subsequent tax years, she’ll have to limit her money purchase contributions to £833.33 a month to stay within the money purchase annual allowance or accept that a charge will be due.
If she does reduce her monthly contribution, she’ll have paid £10,000 to her personal pension over the 2024/25 tax year and have a pension input amount of £25,000 in her defined benefit scheme, to which the money purchase annual allowance doesn’t apply. So there will be no annual allowance charge as she didn’t pay more than £10,000 to her personal pension plan after she triggered the money purchase annual allowance and her defined benefit pension input amount is within what’s known as the alternative annual allowance of £50,000.