FOR ADVISERS ONLY
An explanation of the money purchase annual allowance
- The money purchase annual allowance is currently £4,000.
- Prior to 6 April 2017 it was £10,000.
- What are the main triggers for the MPAA:
- taking an UFPLS
- taking FAD income
- taking more than maximum GAD income from a capped drawdown plan - The MPAA does not apply to defined benefit accrual.
- Case study
On 6 April 2017 the money purchase annual allowance (MPAA) 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.
Anyone taking income from a flexi-access drawdown (FAD) plan or using an uncrystallised funds pension lump sum (UFPLS) will trigger the money purchase annual allowance (MPAA) of £4,000.
For those who are lucky enough to have a final salary scheme the full £40,000 annual allowance (AA) may still apply. Remember individuals with high earnings may be caught by the tapered annual allowance (TAA) and have an AA below £40,000.
What triggers the MPAA?
Mainly the two events mentioned above.
But an individual in capped drawdown who either chooses to convert to FAD or breaches their existing GAD income limits will also trigger it.
| Action | Trigger |
|---|---|
| Take PCLS only (FAD) |  |
| Take PCLS and income (FAD) |  |
| Take UFPLS | |
| Remain in capped DD | |
| Exceed GAD in capped DD | |
| Take annuity | 1 |
| Take "small pot" | |
1If the amount of annuity can reduce or it is a short term annuity in a capped drawdown plan that's over the GAD limit, the MPAA will be triggered. Any other type of annuity won't trigger the MPAA.
When does it apply?
The MPAA applies to all defined contribution (DC) savings made by that individual after the date it's triggered. If this occurs part-way through a pension input period (PIP) only the contributions made after the trigger are tested against the MPAA. However the total contributions/accrual in that tax year are also tested against the £40,000 AA or TAA.
For the avoidance of doubt, this includes contributions made to any other DC plans the individual has in addition to the one they've taken benefits from.
What about DB?
Accrual under defined benefits (DB) arrangements is not tested against the MPAA, but will be included in the test of total contributions against the AA/TAA:
Case study 1
A client enters FAD and takes income. He then contributes £3,500 to his DC arrangement, while DB accrual is £32K. The TAA does not apply.
- As the DC contributions do not exceed the MPAA no AA tax charge is due, and as total contributions do not exceed £40,000 no AA tax charge is due.
An alternative annual allowance of £36,000 applies to the DB savings, but is only required where the MPAA is breached.
What about carry forward?
It's not possible to carry forward unused tax relief against the MPAA. DC contributions must be limited to £4,000 to avoid an AA tax charge.
It is however possible to carry forward unused relief against the full AA if it still applies:
Case study 2 - one year later
The client in the example above makes DC contributions of £4,000 and his DB accrual is now worth £38,000.
- His total contributions exceed the annual allowance of £40,000 however he has £4,500 unused relief available to carry forward from the previous year. DC contributions must still be within the MPAA.
If DC contributions exceed the MPAA a tax charge will be due.
The default chargeable amount is the excess over the AA. However there is also a second test for the alternative chargeable amount to ensure the excess DC conts are not simply offset against DB savings. This is the excess over the MPAA 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 member of the scheme enters FAD and takes income. He then contributes £6,000 to his DC arrangement, while DB accrual is £35,000.
-
The taxable amount is the higher of the alternative chargeable amount (£2,000 + £0) and the default chargeable amount (£1K).
Further information
PTM056500: Annual allowance: money purchase annual allowance
Note
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
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