Money Purchase Annual Allowance

Money Purchase Annual Allowance (MPAA)

Warning - this is complex but very important.

In order to stop people abusing some of the Pension Freedoms rules, the Government introduced a new rule to reduce the amount of money you can pay into your pension pot tax efficiently if you have taken cash or income from your pension in certain ways.

Normally you can get tax relief on pension contributions up to £40,000 a year or 100% of your taxable salary.

But if you take cash or income from your pension in the following ways you will be only be allowed to pay £ 4,000 per annum into your money purchase pension plans before you get hit by an extra tax charge.

You will trigger the MPAA if you

take your entire pension pot as a lump sum
take one or a number of lump sums (known as Uncrsytallised Funds Pension Lump Sum, UFPLS)
take flexi-access drawdown scheme and start to take an income
take income above the maximum limit from a ‘capped drawdown’ plan

You will not trigger the MPAA if you

take a tax-free cash lump sum and arrange a lifetime annuity
take a tax-free cash lump sum and in a flexi-access drawdown plan but don’t take any income
cash in small pension pots valued at less than £10,000

What happens if you exceed the MPAA?

If you are subject to the MPAA, you will get a tax charge on any pension contributions to money purchase pensions which exceed the MPAA in a tax year. This is based on both contributions made by you, and on your behalf e.g. your employer.

Top Tip

If you want to take a cash sum of more than £10,000, (for example £ 15,000) see if you can take more than one payments becuase a cash sum of less than £10,000 will not trigger the MPAA.

For instance, two seperate payments of £7,500 will not trigger the MPAA. This will only work if your pension provider will allow this.