If you choose to flexibly access your pension, you will trigger the Money Purchase Annual Allowance (MPAA). This Allowance currently stands at £4,000.
This means that you will only be able to contribute up to £4,000 to all Money Purchase pensions each year for tax relief purposes.
Also, you will not be able to make use of any unused contribution allowance (Carry Forward) from previous tax years to increase this amount.
Essentially, a Money Purchase Pension (Defined Contribution) is one in which you build up a pot of money that you can use to provide an income in retirement. However, unlike a Defined Benefit Pension arrangement (Final Salary Scheme), which promise a specific income, the income you receive will depend on factors such as the level of contributions paid in and the fund’s investment performance.
If you also have a Defined Benefit Scheme, you may continue to accrue benefits worth up to £40,000 per year in total, in addition to any unused allowance from the previous tax years, across all your pensions without facing a tax charge. However the amount that is contributed to all your Money Purchase pensions must not exceed £4,000 or you will have to pay tax charges.
When will you be affected by the MPAA?
You will be affected by this allowance when you-
- Take benefits flexibly from your Pension
- Exceed your income limit in capped drawdown
- Take an income payment after you have told your scheme administrator you want to move from capped drawdown to flexi-access drawdown
- Purchase a flexible annuity that allows income to decrease
- Have been taking flexible drawdown before 6 April 2015
You will NOT be affected by this allowance if you-
- Take a tax-free lump sum but no other income
- Continue to take income below your annual limit in capped drawdown
- Purchase a traditional lifetime annuity
Please see the following Example Scenario-
John Smith, Age 58, works as a dentist ( NHS and Private Practice)
John has a Self Invested Personal Pension ( SIPP) worth £100,000 and is also a member of a NHS Pension Scheme. He wants to help his daughter with a deposit for her first house, and is seeking to take a lump sum of £30,000 from his SIPP.
John is still working and wants to continue to make contributions into his SIPP and is continuing to accrue benefits in the NHS Scheme.
When John takes out £30,000, the MPAA will be triggered because he has withdrawn more than the 25% tax free element of his SIPP and has flexibly accessed his benefits.
John will now only be able to contribute a maximum of £4,000 per year into his SIPP. This does not however affect the benefits he can accrue in his Defined Benefit NHS Pension Scheme.
He can still accrue benefits of up to £40,000 each tax year in total, plus any available carry forward, as long as he doesn’t contribute more than £4,000 in a tax year into his SIPP.
If John only needed £25,000 to help his daughter, he could have taken this as a tax free lump sum and this would not have triggered the MPAA.