We regularly meet clients who wish to access their pension at the current minimum age of 55, this may be in the form of accessing their tax-free cash or closing and withdrawing all of the capital from some of their smaller pension plans they may have accumulated throughout their working life.

While many of us would like to fully retire at this relatively young age, in reality many clients will expect to continue working and contributing to their pension for the foreseeable future. Without specialist financial advice, there is a little known issue called the Money Purchase Annual Allowance (MPAA) that may restrict you from contributing into your pension in the future and have serious consequences for your overall retirement income planning strategy.

What is the Money Purchase Annual Allowance (MPAA)

The Money Purchase Annual Allowance (MPAA) was introduced on 6th April 2015 in line with other pension flexibilities under the ‘Pensions Scheme Act 2015’ which also paved the way to the variety of income options available today such as ‘Flexi-Access Drawdown’. It was seen as a complete overhaul the pensions industry and as such, it’s relatively new laws have led to some uncertainty and unintended consequences.

When the Money Purchase Annual Allowance rules are triggered, the individual will have reduced annual allowance for future money purchase pension contributions restricted to £4,000.00 per annum (£3,200.00 per annum or just £266.67 per month), subject to your earnings, the annual allowance prior to triggering the Money Purchase Annual Allowance is £40,000.00 per annum.

Triggering the Money Purchase Annual Allowance rules could have serious consequences for you in the future, firstly, you may be expecting to save a higher percentage of your income in your final years of employment as a result of lower expenditure as your children may no longer be dependent, you may be mortgage-free or your earnings are relatively higher than what they were many years ago due to career progression. With the restriction over what you can save into your pension limited to £4,000.00 per annum, you could lose the valuable tax-relief from saving into a pension and many providers will not accept pension contributions where tax-relief is not available.

Another potential issue with unintentionally triggering the Money Purchase Annual Allowance rules is limited the ability to maximise your pension contributions to mitigate potential Inheritance Tax liabilities. If correctly set-up, under current rules, a registered pension currently sits outside of an individuals’ estate for inheritance tax purposes and with the effective use of carry-forward of your annual allowance subject to your earnings, you could contribute up to £160,000.00 in a single tax year into a pension, potentially saving £64,000.00 in inheritance tax. However, if you have triggered the Money Purchase Annual Allowance, this option is lost or at least the benefits are significantly restricted due to the cap on your future pension contributions.

What can trigger the Money Purchase Annual Allowance Rules (MPAA)

Certain events trigger MPAA, once triggered, it applies from the following day and continues to apply in all subsequent years. See below the common methods of income in retirement and whether they may constitute as triggering these rules. This list is not exhaustive and you should take financial advice before accessing your pensions to ensure you are not triggering the Money Purchase Annual Allowance (MPAA) rules unintentionally.

 MPAA Triggers

•      First funds drawn from Flexi-access drawdown arrangement

•      Takes an Uncrystallised Funds Pension Lump-sum (i.e. part tax-free, part taxable payment)

•      Notifies scheme administrator of intent to convert an old capped drawdown plan to Flexi-access drawdown, then takes withdrawal

•      Takes more than permitted from an old capped drawdown plan

•      Receives payment from flexible annuity contract or short-term annuity contract

•      Payment of the above from overseas pension scheme which benefits from tax relief

Not MPAA triggers

•      Receives tax-free lump-sum (AKA Pension commencement lump-sum)

•      Receives trivial commutation lump-sum or small-pots lump sum

•      In receipt of conventional lifetime annuity

•      Remains within permitted withdrawal limits for capped drawdown arrangement

It is important to note that rules for individuals who have a final salary/defined benefit arrangement are subject to different rules.

At PJL Financial Services Limited, we appreciate that the number of options available to you in accessing your pension can become confusing and we are here to support you and discuss with you all of your options to ensure you are able to achieve your retirement goals. Unfortunately, we have dealt with clients who have unintentionally triggered these rules which has impacted their future retirement income planning and would always recommend speaking to a professional before accessing your pensions to ensure it is completed in a way that best suits your personal financial circumstances.
If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

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. It does not constitute advice. 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. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

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