What is the MPAA?
The MPAA was introduced as part of the Pension Freedoms in 2015. It limits how much tax relief you can receive on any contributions you make after you’ve started flexibly drawing your pension. Money purchase restrictions only apply to contributions you make to a defined contribution pension and do not affect defined benefit pensions.
Whenever you pay money into your pension you receive tax relief from the government on your contributions. For the last few years the annual contribution limit has been set at £40,000 and includes money you pay into your pension, tax relief and any payments made by third parties, such as your employer. However, once you begin accessing your defined contribution pension flexibly, the money purchase annual allowance is activated and reduces your annual allowance.
When it was first introduced, the money purchase pension contribution limit was £10,000, but was later reduced. The money purchase annual allowance 2017/18 and onwards is set at £4,000.
Money purchase annual allowance explained
To trigger the pension money purchase annual allowance you must begin taking money out of your pension as a flexible income from the age of 55 or above.
It only applies in certain circumstances when you:
Withdraw your entire pension pot as a lump sum, either in one or ad-hoc instalments
Move your pension into flexi-access drawdown and begin drawing an income
Purchase a flexible annuity
Exceed the withdrawal limit for a ‘capped drawdown’ plan
You’ll usually be exempt from the MPAA pension limits if you:
Only withdraw a lump sum and don’t exceed your 25% tax-free entitlement
Use your pension to purchase a lifetime annuity
Cash in a small pension pot valued at less than £10,000
If you exceed the money purchase pension plan contribution limits you will face a tax charge in line with your marginal rate of income tax. Usually when you make contributions to your pension, you have the option of using the carry forward rule which enables you to claim any tax relief you haven’t used in the previous three tax years. If you are subject to the money purchase annual allowance you’re unable to carry forward any annual allowance.
Remember, the money purchase annual allowance £4,000 won’t take effect until you start drawing the taxable part of your pension. Until then the annual contribution limit of £40,000 will apply.
Make withdrawals with PensionBee
Drawdown is simple with PensionBee. Our service combines all of your old pensions into one easy to manage online plan. Funds are managed by some of the biggest global investment firms such as BlackRock, State Street and Legal & General.
You’ll be able to track how your funds are performing through an online dashboard and once you reach 55 you can access your money in just a few simple steps. Provided you have funds available, payment will be made into your bank account within two to three weeks.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 07-09-2018