16th March 2015

Royal London: Defined benefits and the MPAA

An explanation of the Money Purchase Annual Allowance.

From April anyone taking income from a Flexi-Access Drawdown (FAD) plan or using an Uncrystallised Funds Pension Lump sum (UFPLS) will trigger the Money Purchase Annual Allowance (MPAA) of £10,000.

But for those who are lucky enough to have a final salary scheme the full £40,000 Annual Allowance (AA) still applies.

What triggers the MPAA?

Mainly the two events mentioned above.

But an individual in capped drawdown who either chooses to convert to FAD or breaches their existing GAD income limits will also trigger it.

When does it apply?

The MPAA applies to all Defined Contribution (DC) savings made by that individual after the date at which it's triggered. If this occurs part-way through a Pension Input Period (PIP) only the contributions made after the trigger are tested against the MPAA. However the total contributions/accrual in that tax year are also tested against the £40,000 AA.

For the avoidance of doubt, this includes contributions made to any other DC plans the individual has in addition to the one they've taken benefits from.

What about DB?

Accrual under defined benefits (DB) arrangements is not tested against the MPAA, but will be included in the test of total contributions against the Annual Allowance:

Example 1

A client enters FAD and takes income. He then contributes £6K to his DC arrangement, while DB accrual is £32K.

• As the DC contributions do not exceed the MPAA no MPAA tax is due, and as total contributions do not exceed £40,000 no AA tax charge is due.

An alternative Annual Allowance of £30,000 applies to the DB savings, but is only required where the MPAA is breached.

What about carry forward?

It's not possible to carry forward unused tax relief against the MPAA. DC contributions must be limited to £10,000 to avoid a MPAA tax charge.

It is however possible to carry forward unused relief against the full AA if it still applies:

Example 2 - one year later

The client in the example above makes DC contributions of £10K and his DB accrual is still worth £32K.

• His total contributions exceed the Annual Allowance of £40K, however he has £2K unused relief available to carry forward from the previous year. DC contributions must still be within the MPAA.

If DC contributions exceed the MPAA a tax charge will be due.

The default chargeable amount is the excess over the AA. However there is also a second test for the alternative chargeable amount to ensure the excess DC conts are not simply offset against DB savings. This is the excess over the MPAA added to the excess over the Alterative Annual Allowance of £30k.The taxable amount is the higher of the two calculations:

Example 3

Another member of the scheme enters FAD and takes income. He then contributes £15K to his DC arrangement, while DB accrual is £26K.

• The taxable amount is the higher of the Alternative Chargeable Amount (£5K + £0K) and the Default Chargeable Amount (£1K).

Practical implications

If your client wished to access some of his pension and is still a member of a DB scheme, it makes sense to withdraw money from any DC arrangements first and leave the DB arrangement intact.

Speak with your usual Royal London contact about your clients' individual requirements.

Further information

Download HMRC's draft guidance on the clauses for the Taxation of Pensions Bill Dec 2014.

Pensions, Pension Reforms