In 2015, with a view to avoiding the abuse of pension recycling, the money purchase annual allowance (MPAA) was born, limiting defined contributions (DC) for those who have taken pension income flexibly to £10,000 per annum, with no allowable carry forward.
The MPAA rules will affect any individual who was either in flexible drawdown prior to April 2015 or who has accessed income flexibly since April 2015. Accessing flexibly includes:
- Taking uncrystallised fund pension lump sum (UFPLS)
- Accessing income under flexi-access
- Taking capped drawdown income above the maximum
- Stand-alone lump sums (in some circumstances where a stand-alone lump sum is paid from 6 April 2015, the MPAA will also apply)
- Taking out a flexible annuity
- Taking a scheme pension where there are fewer than 12 members in the scheme
However, the following do not trigger the MPAA:
- Small pots or defined benefits (DB) triviality payments – three pots of up to £10,000 can be withdrawn from non-occupational DC pension funds; there is no limit to the amount of small pots that can be taken from occupational DC pension funds
- Taking tax-free cash, but not taking income
- Taking income flexibly as a dependant taking income from a fund wholly attributable to disqualifying pension credits
- Scheme pension under a DB scheme
- Non-flexible/standard annuity
- Entitlement to a scheme pension under a money purchase arrangement where at least 11 other individuals are receiving a scheme pension or a dependant’s scheme pension
In the Autumn Statement 2016, the Chancellor confirmed (following consultation) the intention to reduce the MPAA to £4,000 with effect from April 2017, citing that only 3% of individuals aged 55 and over make defined contributions of more than £4,000.
Following the Chancellor Budget last Wednesday, a policy paper was published by HRMC and confirmation received that whilst the consultation response would be forwarded later in March, the government had elected to reduce the MPAA as planned, effective from April 2017
We are disappointed that HMRC have elected to reduce the MPAA this way. The reduction will affect pension savers who may have elected to reduce hours and are taking pension income to supplement retirement income, many of whom may be active members of a staff pension scheme.
In addition, at a time when employers are being encouraged to provide good quality pension provision for staff, this could create a divide between older workers who may have flexibly accessed other pension arrangements, and those who have not. This could create a differential between higher earners who as a result of age (and flexibly accessing pension benefits) are subject to tax charges as a result of joining a staff pension scheme.
If tax charges do apply as a result of this reduction in the MPAA, whilst SSAS or SIPP schemes are likely to offer individual the option of scheme pays, it is unlikely that workplace pension schemes would offer scheme pay options for payments above the reduced MPAA. Unless HMRC makes changes, mandatory scheme pay options are triggered by reference to the standard lifetime allowance of £40,000, so this could result in some older employees in workplace pension schemes being liable for tax charges merely as a result of joining the employer’s pension scheme.
We will continue to work with clients affected by the reduction in the MPAA but if you do have any queries, please contact your Mattioli Woods’ Consultant.