Although many UK adults (and/or their employer) can pay £60,000 into a defined contribution (money purchase) pension in each tax year and receive full tax relief, certain savers have a £10,000 contribution limit, depending on how, or whether, they have accessed their pension assets. This limit is known as the Money Purchase Annual Allowance, or MPAA.
What is the MPAA?
The standard annual allowance of £60,000 is reduced to £10,000 when someone takes taxable income from a defined contribution pension (from the age of 55). UK adults who have reached pension age need to be wary, as whether or not the MPAA is triggered depends on how pension benefits are accessed.
Inadvertently triggering the MPAA can have major consequences, as this places a limit on all future pension contributions. This is especially relevant for those still in full- or part-time employment, who may wish to carry on contributing larger sums to their pension.
Tip: In light of this, certain savers may opt to hold the taxable portion of private pensions back for later life, and draw income from other assets, such as ISAs, first.
When is it triggered?
The reduced allowance applies only after a ’trigger event’ has occurred. The most common trigger events are:
- Taking pension income from a flexi-access drawdown account, after cashing out the 25% tax-free lump sum entitlement.
- Taking some, or all, of your pension savings as a taxable lump sum.
- Using pension savings to buy an annuity where income could decrease over time (i.e. investment-linked annuities).
- Exceeding income limits from a capped drawdown arrangement set up before 6 April 2015.
- Converting a pre-2015 capped drawdown account into a flexi-access drawdown account.
Which actions do not trigger the MPAA?
There are certain circumstances where accessing pension benefits will not trigger the MPAA. These events include the following:
- Taking the 25% tax-free cash only.
- Using pension savings to buy a lifetime annuity where the income cannot go down.
- Taking income from a pre-2015 capped drawdown arrangement that is within the drawdown limit.
- Taking a small pension pot worth less than £10,000 as a cash lump sum.
- Taking income from a defined benefit pension plan.
What to watch out for
It’s important to bear in mind potential penalties. You don’t incur an immediate tax charge when you initially trigger the MPAA. But those who are already subject to the limit would face a tax charge in the relevant tax year if they were to exceed the £10,000 contribution ceiling in the future.
Tip: It is not possible to carry forward unused annual allowances from prior tax years, once the MPAA has been triggered. With careful planning, a saver can continue to pay substantial sums into their pension annually.
Expert advice can prevent an unplanned triggering of the MPAA. To find out more, please call 03300 564 446, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
