Amidst the flurry of pension tax changes in this year’s Budget, the money purchase annual allowance will increase to £10,000 a year from April 2023, significantly up from the current £4,000.
This is an area where Canada Life lobbied for change, and we are pleased the chancellor has listened.
However, with a restricted allowance still in place, complexities remain, and clients will need help from advisers navigating their way through this complex piece of tax legislation.
As a reminder the MPAA is a limit on the amount of money an individual can contribute to their defined contribution pension scheme after they have flexibly accessed their pension savings.
It was introduced in April 2015 to prevent individuals from recycling income from flexi-access drawdown back into their pension to gain further tax-free cash.
The MPAA was initially set at £10,000 a year, reduced to £4,000 from April 2017, and it now reverts to £10,000 from April 6 2023.
Any individual who has previously triggered the MPAA will now be able to put in £10,000 a year rather than the old limit of £4,000 – although this is still well below the new standard annual allowance of £60,000.
Even with a higher MPAA many complexities remain.
For those who trigger the MPAA in future, in the first tax year the MPAA applies it is only contributions paid to DC schemes after the date of the trigger event that are measured against the MPAA of £10,000.
For subsequent tax years, all contributions made to DC schemes in a tax year count towards the MPAA. In addition, in both situations the client cannot carry forward any unused relief from previous years.
Trigger events include taking an uncrystallised funds pension lump sum, taking taxable income from flexi-access drawdown and taking an income from capped drawdown in excess of the cap.
However, taking just tax-free cash from a DC scheme does not trigger the MPAA, nor does the purchase of a guaranteed lifetime annuity.
What to do once MPAA is triggered
There are some information requirements that must be met once benefits are flexibly accessed.
When an individual first flexibly accesses benefits, the scheme must notify the individual of the trigger date within 31 days – this is known as a ‘flexible access statement’.
The individual must then pass that information on to all other DC schemes they are contributing to, within 91 days of receiving the flexible access statement.
If the member subsequently starts making contributions to another DC scheme, they must notify that scheme the MPAA applies to them within 91 days.
If a pension provider knows an individual has flexibly accessed their benefits and the individual transfers to another scheme, the transferring provider must tell the receiving provider, and confirm the trigger date.
DC schemes must automatically provide pension savings statements to individuals that they know, or believe, have flexibly accessed their pension benefits and contributions to the scheme within the tax year exceed the MPAA.
Failure to meet any of these information requirements can lead to fines.
'Alternative annual allowance' for DB members
As the name suggests, the MPAA does not apply to defined benefit pension schemes, as they do not offer flexible access to pension savings.
However, many DB members also have a DC pot. And if that is the case the lesser known ‘alternative annual allowance’ may come into play to measure the increase in the DB benefits where the MPAA has been exceeded.
The AAA was previously £36,000 but that rises to £50,000 from April 6 2023, and carryforward is also available for the DB scheme if needed.
Other complexities arise when an individual is subject to both the tapered annual allowance and the MPAA.
In this situation the TAA will be the overall annual allowance, although the MPAA will still apply to the level of contributions that can be made to a DC scheme.
Despite the helpful increase, this whole area could do with simplifying.For example, if an individual’s TAA is £21,000, the client could pay the MPAA of £10,000 to the DC scheme, leaving £11,000 available for the DB scheme.
If someone does exceed the MPAA, the annual allowance tax charge is not a fixed rate, it effectively reclaims any tax relief given on the contributions. So, the excess is added to other taxable income and taxed appropriately.
Normally, any tax charge arising is paid by the individual via a self-assessment return.
However, it is possible a scheme could agree to pay the charge and reduce the member’s benefits accordingly. It is not possible to force a scheme to pay as that is only an option where the standard annual allowance has been exceeded.
It is a positive that the MPAA was increased in the Budget, as fewer people will be affected.
But as this article illustrates, even with a higher MPAA many complexities remain, and those who are, or could be, affected will need advice to navigate the options and implications.
Despite the helpful increase, this whole area could do with simplifying.
Andrew Tully is technical director at Canada Life
