MPAA triggers can cause a little confusion when it comes to pensions. Here’s everything you need to know.
What is the MPAA?
The money purchase annual allowance is the tax-free amount you can save annually into your money purchase – or defined contribution – pension once you have triggered certain conditions. It was brought in at the start of the 2015/2016 tax year to prevent savers avoiding tax on their current earnings, or manipulating their pension scheme to gain two rounds of tax relief.
What are the MPAA triggers?
To know whether the MPAA is relevant to you, we need to understand the MPAA triggers. Generally speaking the MPAA is only triggered once you have started to draw income from your pension pot.
Let’s take a look at some of the specific ways you can trigger MPAA.
If you take your entire pension pot as a lump sum or start to withdraw taxable ad-hoc lump sums
If you put your pension savings into a flexi-access drawdown scheme and start to take an income
If you use your pension savings to purchase a flexible or investment-linked annuity where your income could go down as well as up
If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap
The MPAA normally won’t be triggered if:
You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed lifetime income (one that either stays level or increases)
You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
You withdraw small pension pots valued at less than £10,000
How do you know if you have triggered the MPAA?
If you do something that triggers the MPAA, your pension provider will send you a formal notification – called a flexible access statement – within 31 days of the trigger. This will explain everything you need to know. If you have any other money purchase or defined contribution pensions, you will need to pass on the information contained in your flexible access statement to the pension providers within 91 days.
How does MPAA affect your pension contributions?
Triggering MPAA has big implications if you are still saving into your pension. Once triggered, MPAA prevents you from saving more than £4,000 tax-free into your defined contribution pension scheme each year – rather than £40,000. Exceeding the MPAA – which you will do by paying more than £4,000 into your defined contribution pension in a single tax year – will incur tax charges.
If you have a defined benefit scheme, you can still pay up to £36,000 (£40,000 minus the £4,000 MPAA) plus any carry forward, tax-free, into your pension.
Want a little extra advice?
If you still have questions about MPAA triggers, give us a call – our friendly financial advisers can help you. And – of course – there’s no charge for an introductory conversation about getting to grips with the nuances of your pension. Nothing in this article construes, or is intended to construe, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of pension planning, to ensure any recommendations made will be suitable for your needs and circumstances. CONTACT US This article was written by Adam Prestwood.