Money purchase annual allowance (MPAA) - Case studies
Case studies demonstrating how the MPAA works for a selection of tax years.
- The MPAA limit applies from the trigger date of flexible access.
- Once the MPAA is triggered it applies for the remaining lifetime of the individual who flexibly accessed their pension fund.
- The MPAA does not apply if the individual is accessing income through dependant, nominee or successor flexi-access funds and they haven’t flexibly accessed their own pensions.
- The alternative annual allowance can be increased using carry forward, the MPAA limit cannot.
- If you don’t use your MPAA limit in any one tax year, you cannot use this in a later tax year. Use it or lose it!
How the money purchase annual allowance works
Case study one: accessing flexible benefits during the current tax year, defined contribution inputs
David has a personal pension and he has no available carry forward. For the pension input period (PIP) ending at the end of this tax year David has contributed £50,000 to his pension.
David contributes £20,000, prior to accessing flexibility, by making an Uncrystallised Funds Pension Lump Sum (UFPLS). This triggers the Money Purchase Annual Allowance. The UFPLS is withdrawn on 1 May.
Following this, a further £30,000 is contributed to the personal pension.
1. Calculate the chargeable amount on the Money Purchase Input Sub-Total
£30,000 (post trigger input) - £4,000
MPIST chargeable amount = £26,000
2. Calculate the Defined Benefit Input Sub-Total
£0 + £20,000 (pre trigger input) - (£36,000 or the relevant lower amount should the tapered annual allowance apply + £0)
DBIST chargeable amount = £0
3. Calculate the Alternative Chargeable Amount
Step 1 result + Step 2 result
£26,000 + £0
ACA = £26,000
4. Calculate the Default Chargeable Amount
£50,000 - £40,000 or the relevant lower amount should the tapered annual allowance apply
DCA = £10,000
5. Identify the Chargeable Amount
Higher of ACA and DCA
Chargeable Amount = £26,000.
Case study two: accessing flexible benefits during the last tax year, defined contribution inputs
Richard first accessed flexible benefits in the last tax year.
Richard has his own business. He pays a personal contribution of £500 per month (on 28th of each month) and tops this up with an employer contribution of £34,000 per annum to fully use his annual allowance each year. The employer contribution is paid just before the end of the company’s accounting period which is 31st October.
Richard’s daughter separated from her civil partner and needed funds to buy out her share of their home. Richard offered to help and took benefits from his paid-up personal pension, which had a value of £200,000, on 4 July in the last tax year. He took £50,000 pension commencement lump sum and an ad-hoc flexi-access drawdown payment of £20,000. His plan was that with his salary of £8,000 and dividends of £78,000 he would not lose any personal allowance, nor would he breach the threshold income limit of £110,000 for the tapered annual allowance, but he overlooked the implications of triggering the MPAA.
It’s not as simple as looking at the total pension inputs for the last tax year of £6,000 against the MPAA limit of £4,000 and saying the AA excess is £2,000. We need to look at the standard annual allowance rules for contributions paid before the MPAA trigger date of 4 July, and also the MPAA rules for any DC contributions paid after that date.
Monthly contributions paid 28th April, May and June, so 3x £500, are tested against the standard AA of £40,000 less the MPAA limit of £4,000 where this has been used, as it has been in this scenario. £1,500 is less than £36,000 so there is no excess amount at this point. If there had been an excess amount here, you can use carry forward of unused annual allowance to reduce/ absorb it.
Monthly contributions continued to be paid between 28th July and 28th March of the last tax year inclusive, which add up to 9x £500 = £4,500. This exceeds the MPAA limit of £4,000 leading to an MPAA excess of £500. It is not possible to use carry forward to reduce or absorb any of this excess amount.
Any employer pension contribution paid between 4th July and 5th April would simply add to this AA excess amount, which Richard would need to report through self-assessment working out his tax charge using the relevant tax rate.
Case study three: accessing flexible benefits during the last tax year, defined benefit and defined contribution inputs
Estelle had a trigger event last tax year and she has the added complication of defined benefit inputs as well as defined contributions using up her annual allowance.
Estelle was earning £30,000pa working part-time for an employer with a non-contributory defined benefits pension scheme. On 1 September she increased her hours to full-time working and, because of this sharp increase in pensionable pay, her pension input amount is larger than normal, at £16,000.
Estelle also works on contracts arranged with her own Limited company. She takes no salary but pays herself a monthly pension contribution of £2,000 on the 1st of each month.
To supplement her, formerly part-time, income she has a capped drawdown arrangement from which she takes £1,250pm (£15,000pa). Estelle’s maximum GAD reduced to £14,000. However, Estelle asked her provider to maintain her income at £1,250pm. To achieve this, the arrangement was converted from capped to flexi-access drawdown immediately before the payment of £1,250 made on 4 July. This payment triggered the MPAA.
This is similar to case study two in that we need to look at the standard annual allowance rules, but this time we look at the total of the defined benefit pension input amount (DBPIA) plus the value of money purchase contributions paid before the MPAA trigger date of 4 July, and then the MPAA rules for any DC contributions paid after that date.
The DBPIA is £16,000. Monthly contributions were paid on 1st May, June and July, so 3x £2,000 = £6,000. A total of £22,000 is tested against the standard AA of £40,000 less the MPAA limit of £4,000 where this has been used. Estelle is not affected by a tapered annual allowance or else it would be used instead of the standard AA figure. £22,000 is less than £36,000 so there is no excess amount at this point.
Monthly contributions continued to be paid between 1st August and 1st April inclusive, adding up to 9x £2,000 = £18,000. This exceeded the MPAA limit of £4,000 and gave an MPAA excess of £14,000.
Estelle would have been able to avoid an MPAA excess had she stopped employer pension contributions after the one paid on 1st September. Her DBPIA amount does not count towards the £4,000 limit. She could have looked at other ways of extracting her company profits tax efficiently and we have an article (The best ways to extract profits from your business) and a calculator tool to help with this.
Case study four: accessing flexible benefits TWO tax years ago, defined contribution inputs
Jack first accessed flexible benefits 2 tax years ago.
Following an illness in June three tax years ago he needed an extended time off work. A year later his salary (usually £60,000pa) stopped, replaced with a smaller amount of sick pay. He took an uncrystallised funds pension lump sum (UFPLS) to maintain his mortgage payments and other household bills.
In June of the last tax year he fully recovered and returned to work. Both Jack and his employer resumed contributions at 5% of salary to the company’s defined contribution pension scheme. Based on 10 month’s salary (£50,000), a total 10% monthly contribution meant DC inputs of £5,000. The previously paid UFPLS payment triggered the MPAA which means Jack has the MPAA limit of £4,000 for all DC inputs in the last tax year. Remember you cannot use carry forward to increase this limit.
This gave Jack an annual allowance excess of £1,000 last tax year which he must report through self-assessment leading to a minimum tax charge (the rate for the tax charge depends on total taxable income) of 40% of this ie £400 to pay by 31 January this tax year.
Case study five: accessing flexible benefits during 2015/16, a tapered annual allowance and the money purchase annual allowance both apply for all pension savings (DC and DB inputs) in tax year 2016/17.
Ross flexibly accessed pension benefits in January 2016 and for tax year 2016/17, based on his usual salary and other incomes, he expected to have a tapered annual allowance of £32,000. This means that his annual allowance for all pension inputs would have been £32,000 instead of the standard amount of £40,000.
Ross was an active member of his employer’s defined benefit (equally, it could have been a career average) scheme. This is a non-contributory scheme, although Ross was eligible to contribute to the scheme’s money purchase AVC section.
Remember that although you cannot use carry forward of unused annual allowance to increase the MPAA limit in any tax year, you can use available carry forward to increase your ‘alternative annual allowance’.
Ross chose to pay an individual contribution of £10,000. This used his full MPAA limit for 2016/17 (which only reduced to £4,000 from 6 April 2017). His alternative annual allowance of (£32,000 - £10,000) £22,000 can be used to meet other non-money purchase pension saving, in this case, the defined benefit pension input amount.
If Ross had decided instead to pay only £5,000 to the AVC scheme, this would have left alternative annual allowance of £27,000 (£32,000 - £5,000) to meet the defined benefit pension input amount.
If Ross was unexpectedly made redundant on 31 March 2017 then he should have reviewed his tapered annual allowance calculation. However, in this scenario, he simply accepted his taxable redundancy settlement as an employer pension contribution. This increased his adjusted income to £210,000 making him subject to the minimum tapered annual allowance of £10,000. There would have been other options, explained in our planning article (Tapered annual allowance: planning ideas and potential pitfalls), and this demonstrates the value of taking financial advice.
As Ross paid an AVC of £10,000, this would have used his full MPAA limit for 2016/17, and as his tapered annual allowance was also £10,000, there is £0 alternative annual allowance. He would need to look for unused annual allowances from the three earlier tax years,
Overall, these rules are positive as they allow those who have accessed flexibility to continue to benefit from pension contributions; compared to the previous “Flexible Drawdown” (replaced by Flexi-access drawdown in April 2015) rules where the annual allowance was zero. This is particularly important given changing retirement patterns and the fact that it is now common for pension contributions to continue after initial crystallisation. A continuation of the previous zero AA would have resulted in issues in future. However, the reduction in MPAA could impact those who access benefits flexibly and then belong to a pension scheme where the employer pays more than the minimum required by auto-enrolment.
It is crucial that clients who intend to flexibly access retirement benefits are fully aware of the MPAA and how it will affect any future pension savings they are planning. The MPAA limit may seem to work against individuals who have the means and the will to save for their own retirement, however, where it applies, it reduces the cost to the Treasury of pensions tax relief.
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