Money purchase annual allowance

Anyone taking income from a flexi-access drawdown plan or using an uncrystallised funds pension lump sum will trigger the money purchase annual allowance of £4,000.

For those who are lucky enough to have a final salary scheme, the full £40,000 annual allowance may still apply. Remember, individuals with high earnings may be caught by the tapered annual allowance and have an annual allowance below £40,000.

On 6 April 2017 the money purchase annual allowance reduced from £10,000 to £4,000. However, this only became law on 16 November 2017 when the Finance Act (No.2) 2017 received Royal Assent.

What triggers the money purchase annual allowance?

Mainly the two events mentioned above.

But an individual in capped drawdown who either chooses to convert to flexi-access drawdown or exceeds their existing Government Actuary's Department income limits will also trigger it.

1_{If the amount of annuity can reduce, or it is a short-term annuity in a capped drawdown plan that's over the Government Actuary's Department limit, the money purchase annual allowance will be triggered.  Any other type of annuity won't trigger the money purchase annual allowance.}

When does it apply?

The money purchase annual allowance applies to all defined contribution savings made by that individual after the date it's triggered. If this occurs part-way through a pension input period only the contributions made after the trigger are tested against the money purchase annual allowance. However, the total contributions/accrual in that tax year are also tested against the £40,000 annual allowance or tapered annual allowance.

For the avoidance of doubt, this includes contributions made to any other defined contribution plans the individual has in addition to the one they've taken benefits from.

What about defined benefit?

Accrual under defined benefits schemes isn't tested against the money purchase annual allowance, but is included in the test of total contributions against the annual allowance/tapered annual allowance:

Case study 1

An individual enters flexi-access drawdown and takes income. He then contributes £3,500 to his defined contribution arrangement, while defined benefit accrual is £32,000.  The tapered annual allowance does not apply.

An alternative annual allowance of £36,000 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 money purchase annual allowance. Defined contribution contributions must be limited to £4,000 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 £4,000 and his defined benefit accrual is now worth £38,000.

If defined contribution contributions exceed the money purchase annual allowance 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 to ensure the excess defined contribution contributions are not simply offset against defined benefit savings. This is the excess over the money purchase annual allowance added to the excess over the alternative annual allowance of £36,000.  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 £6,000 to his defined contribution arrangement, while his defined benefit accrual is £35,000.

Do I have to tell anyone I’ve triggered the money purchase annual allowance?

Where an individual has flexibly accessed their benefits under a scheme, they'll receive a flexible access statement. They're required to notify schemes, where they're still actively accruing benefits, they've flexibly accessed their benefits. This can be done by sending a copy of the statement.

When do they have to tell them?

They must, within, 13 weeks:

• give the scheme administrator or scheme manager a copy of the flexible access statement, or
• tell the scheme administrator or scheme manager they have received a flexible access statement, and either the date of the relevant event or, where applicable, that the relevant event occurred more than two years before the start of the relevant 13-week period.

In addition if they become a member of another registered pension scheme after the start of their 13-week notification period, then within 91 days beginning with the date they became an accruing member, they must also tell that scheme they've flexibly access their benefits.

What is an accruing member?

For a defined contribution plan this means contributions are being made by the individual, their employer or somebody on behalf of the individual.

For a cash balance or hybrid plan there is currently 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 do this if they joined the new scheme as a result of a recognised transfer from another registered pension scheme, QROPS or former QROPS after the date of the relevant event and no contributions are being paid.

The individual also doesn't have to pass on information about receiving a flexible access statement to a scheme administrator if they've already told them they've flexibly accessed their pension.