What is MPAA?
The MPAA is in connection to the annual allowance for pension contributions which is £40,000 however you can carry forward unused pension contributions for the previous three years. The MPAA was introduced on 6th April 2015. It was £10,000 in tax years 2015/16 and 2016/17. MPAA was reduced to £4,000 from 2017/18, It remains at £4,000 in 2018/19.
What are the MPAA rules?
Once the MPAA has been triggered, this will affect every tax year onwards including the year which the MPAA was triggered.
What will trigger the MPAA?
Take income from a flexi-access drawdown (FAD) plan.
Take an uncrystallised funds pension lump sum (UFPLS). Taking a certain amount some tax free and some taxable or the whole amount out of your pension.
Convert capped drawdown to FAD and then draw some income.
Take more than 150% Government Actuary’s Department (GAD) from a capped drawdown plan.
Receive a stand-alone lump sum when entitled to primary protection and TFC protection is more than £375,000.
Receive a payment from a flexible lifetime annuity (ie. one where payments can decrease).
Receive a scheme pension from a Defined Contribution (DC) arrangement where it’s being paid directly from those DC funds to less than 11 other members.
In addition, anyone in flexible drawdown before 6th April 2015 is subject to the MPAA from 6th April 2015 (irrespective of whether they have taken an income withdrawal before then).
The above relate to a member and their own funds – these triggers don’t apply where benefits are being paid to a dependant/beneficiary. Complexity is created if you have both a defined benefit (DB) and DC personal pension. Even having one employee/employer crystallised benefit limits your contribution to £4,000 with no ability to use carry forward.
An example of how MPAA works:
David has a DC arrangement and a DB arrangement and has flexibly accessed his DC arrangement in tax year 2018/19, which triggers the MPAA test in addition to the Annual Allowance test for that tax year (and subsequent tax years). The tapered Annual Allowance does not apply to David for the tax year concerned.
David’s pension contribution into his DC pension for the tax year is £3,000. As this is less than the allowance for money purchase pension input amounts there is no further test against the MPAA for the tax year concerned.
His total pension input amount for the tax year is therefore tested against the Annual Allowance for the tax year. In this case a £40,000 annual allowance, as the tapered annual allowance does not apply.
David’s pension input amount for his defined benefits arrangement is £32,000. This means his total pension input amount for the tax year is £35,000 (£3,000 + £32,000). As this is less than £40,000, no annual allowance charge is due for the tax year.
Also, David has £5,000 unused annual allowance to carry forward to the next tax year. He has no other unused annual allowance to carry forward from previous tax years.
What should you think about?
We would recommend people to seek professional advice from your financial planner to discuss how MPAA would affect your pension contributions after crystallising your DC pension scheme.