Money purchase annual allowance

What is the money purchase annual allowance (MPAA)?

The Money Purchase Annual Allowance (MPAA) is a reduced annual allowance for pension contributions after an individual has flexibly accessed their pension savings.  Triggering the MPAA  usually involves taking an uncrystallised funds pension lump sum or starting taking income from a flexi-access drawdown plan. 

The MPAA is set at £10,000 compared to the standard annual allowance of £60,000.

For those who are lucky enough to have a defined benefit scheme, the full £60,000 annual allowance may still apply. Remember, individuals with high earnings may be caught by the tapered annual allowance and have an annual allowance below £60,000.

For historic MPAA amounts, visit Annual allowance and money purchase annual allowance.

What triggers the MPAA?

Mainly the three events mentioned above in the key facts.

Below summarises what does and doesn’t trigger the MPAA:

¹If the amount of an annuity can reduce, the MPAA will be triggered. This also applies if it is a short-term annuity in a capped drawdown plan that exceeds the Government Actuary's Department limit.  Any other type of annuity won't trigger the MPAA.

When does the MPAA apply?

The MPAA applies to all defined contribution savings made by the individual after it is triggered. If this happens part-way through a pension input period, only the contributions made after the trigger are tested. These contributions are tested against the money purchase annual allowance. However, the total contributions and accrual in that tax year are also tested. They are tested against the £60,000 annual allowance or the tapered annual allowance. 

For clarity, this rule includes contributions made to other defined contribution plans the individual has in addition to the one they’ve taken benefits from.

Are defined benefits tested against the MPAA?

Accrual under defined benefit schemes isn't tested against the MPAA. However, it is tested against the annual allowance or tapered annual allowance along with any other contributions. 

Case study 1

An individual enters flexi-access drawdown and takes income. He then contributes £6,500 to his defined contribution arrangement, while defined benefit accrual is £50,000. The tapered annual allowance does not apply.

An alternative annual allowance of £53,500 applies to the defined benefit savings but is only required where the annual allowance is exceeded.

What about carry forward?

It's not possible to carry forward unused annual allowance against the MPAA. Defined contribution contributions must be limited to £10,000 to avoid an annual allowance tax charge.

It is however possible to carry forward unused annual allowance against the full annual allowance if it still applies:

Case study 2 - one year later

The individual in the example above makes defined contribution contributions of £10,000, and his defined benefit accrual is now worth £54,000. 

If defined contribution contributions exceed the MPAA a tax charge will be due.

The default chargeable amount is the excess over the annual allowance. However, there is also a second test for the alternative chargeable amount. This test ensures that the excess defined contribution contributions are not simply offset against defined benefit savings. This is the excess over the MPAA added to the excess over the alternative annual allowance of £50,000. The taxable amount is the higher of the two calculations:

Case study 3

Another individual enters flexi-access drawdown and takes income. He then contributes £12,000 to his defined contribution arrangement, while his defined benefit accrual is £49,000.

Does an individual have to tell anyone they’ve triggered the MPAA?

If an individual has flexibly accessed their benefits under a scheme, they will receive a flexible access statement. They are required to notify any schemes where they are still actively accruing benefits that they have flexibly accessed their benefits. This can be done by sending a copy of the statement.

When do they have to tell them?

They must notify the scheme administrator or scheme manager within 13 weeks. 

They can do this in one of two ways: 

• Provide a copy of the flexible access statement to the scheme administrator or manager.
• Notify the scheme administrator or manager that they have received a flexible access statement. They must also provide the date of the relevant event. If applicable, they should state that the relevant event occurred more than two years before the start of the 13-week period. 

Additionally, if they become a member of another registered pension scheme after the start of the 13-week notification period, they must tell that scheme they have flexibly accessed their benefits. This must be done within 91 days of becoming an accruing member.

What is an accruing member?

• For a defined contribution plan, an individual is an accruing member if contributions are being made by the individual, their employer, or someone on their behalf.
• For a cash balance or hybrid plan, there is an arrangement for the accrual of benefits in respect of the individual under the arrangement. 

Are there any exceptions?

• The individual doesn’t need to notify the scheme if they joined the new scheme due to a recognised transfer. This transfer can be from another registered pension scheme, QROPS, or former QROPS. This applies only if no contributions are being made after the relevant event. 
• If they have already informed the scheme administrator that they have flexibly accessed their pension, they don’t need to pass on information about receiving a flexible access statement.