HELP & ADVICE
The restrictions of the money purchase annual allowance (MPAA) were created to stop people from claiming tax relief twice by withdrawing their pension and then paying it straight back into the pension.
The MPAA is £10,000 from 6 April 2023, this is only 1/6th as big as the annual allowance of £60,000.
MPAA kicks in when you start to access your pension pot for the first time, namely, you take your whole pension pot in the form of a lump sum or you take a series of taxable lump sums from your pension pot.
Taking the tax-free cash from your pension does not trigger the Money Purchase Annual Allowance.
Below is a real life lead that was generated through the Regulated Advice platform
Age 58 and has a Defined Contribution pension with Legal and General with £70,000. She accessed the pot in 2020 when she was 55 and took out £41,000, she was not working at the time due to caring for someone, she re-joined the company last year and was re-enrolled into the pension. She has had a letter stating she has triggered the money purchase annual allowance, and wants to speak to a financial advisor to see if it still in her best interest to pay her excess income into her pension or direct her funds elsewhere. Happy to receive remote advice if needed.
The following is a breakdown of the case study above:
It’s the tax year 2020/21 and she takes a taxable lump sum of £41,000. This is an event that triggers the MPAA to kick in. There were no pension contributions that were paid in the tax year 2020/21 as she was not working at the time. These would have been the standard annual allowance of £40,000 at the time.
She rejoins the company in May 2022 and re-enrolls into her pension. But all the contributions that she pays after the trigger date are measured against the MPAA of £4,000 for that tax year and she contributed £5,000 towards her pension. She will now face an additional tax charge on the excess contribution and should seek advice as to whether a pension is still the best place to pay her excess income.
For the tax year 2020/21, she will grace a tax liability on the £1,000.
If she continues to work, assuming she is on a modest salary of £30,000 per year, then it is unlikely the MPAA will be affected as the allowance has been increased and she can continue to grow her pension pot unhindered.
However, this may be a different story if she was on a substantial earnings where her pension contribution would be capped at £10,000 per year, rather than the annual allowance of £60,000 and she may have to rely on normal savings for her pension.
There are certain arrangements and actions you can take to avoid triggering the MPAA. Here are some scenarios where MPAA may not be triggered:
Take a tax-free lump sum and buy an annuity: If you use your pension to purchase an annuity that provides a guaranteed minimum income, this may not trigger the MPAA.
Take a tax-free lump sum and set up a drawdown scheme without taking income: If you take a tax-free lump sum from your pension and set up a drawdown scheme but do not withdraw any income from the drawdown scheme, this may not trigger the MPAA.
Cash in pension pots with a value of less than £10,000: Cashing in smaller pension pots, typically those with a value of less than £10,000, may not trigger the MPAA.
Navigating MPAA and understanding the rules, regulations, and evolving schemes related to pensions is indeed crucial to avoid tax liability or even fines.
Given the complexity of pension regulations and the potential impact on your retirement plans, seeking professional advice is highly advisable.
Consulting with a financial advisor can help you understand the intricacies of the MPAA and ensure that you make informed decisions about your pension contributions and withdrawals.
Ryan is a co-founder of the firm RMT Group Limited and the brand Regulated Advice. Ryan is also a content writer for this site.