The MPAA (money purchase annual allowance) limits the amount of money that you can deposit into your pension without paying tax. This is only once you’ve started gaining an income from your pension. For the financial year 2020/21, the MPPA is £4,000.
What does the MPAA Mean for Your Pension?
The money purchase annual allowance has been part of the Pension Freedoms since 2015. It determines the amount of tax relief you can receive. Tax relief is usually granted on pay-ins you make after you’ve withdrawn from your pension. However, money purchase restrictions are only for contributions made to a defined contribution pension. It doesn’t apply to any defined benefit pensions.
Whenever you put cash into your pension, the government should give you tax relief on your contributions. This annual contribution limit has been £40,000 for the last couple of years. The limitation applies to cash paid into your pension, tax relief and any third-party payments (like that of an employer). However, the moment that you start to access your defined contribution pension flexibly, the money purchase annual allowance starts to run and in turn, reduces your yearly allowance.
In the beginning, the money purchase pension contribution limit was set at £10,000. That has been reduced dramatically. Recently, the MPAA is now set at £4,000.
MPAA in a Nutshell
The moment you start to withdraw cash from your pension to act as an income, the MPAA is triggered. And only from 55 or up.
The MPAA is only triggered in certain circumstances like when you:
- Cash in your pension pot entirely and as a lump sum (this could happen in either one or ad-hoc segments)
- Put your pension into Flexi-access drawdown and start to draw an income
- Buy a flexible annuity
- Withdrawal more than your ‘capped drawdown’ plan
Usually, you won’t have to think about the MPAA pension limits if you:
- Cash in only a lump sum which doesn’t exceed the 25% tax-free limit
- Buy a lifetime annuity with your pension funds
- Cash in a pension pot which is less than £10,000
When you go above the money purchase pension plan contribution limits, you will be taxed according to your marginal income tax rate. Usually, when you pay into your pension pot, you can use the forward carry rule. This rule allows you to claim unpaid tax relief from the previous three tax years. Unfortunately, if you are under the MPAA, you won’t be able to carry forward any annual allowance.
Keep in mind: the £4,000 MPAA won’t be active until you start cashing in the part of your pension that can be taxed. If so, you’ll be limited to the £40,000yearly contribution.
Make withdrawals with PensionBee
Bob’s your uncle! Drawdown1 is done quickly with the help of PensionBee. We combine all your pensions into one. This one unit can be managed online, just like that. BlackRock, State Street Global Advisors, HSBC and Legal & General will manage your funds.
You’ll be able to look at the well-being of your funds and their performance by visiting the online dashboard. And better yet, and once you hit 55, you can access your pension funds in an instant. As long as your bank details are verified, you’ll receive your money within 7-10 working days.
The acronym means Money Purchase Annual Allowance. And what that means for you is that there’s a specific amount you’re allowed to withdraw per year. So you’ll need to make sure what amount you’re eligible to gain access to before you withdraw money from your pension.
The Money Purchase Annual Allowance only comes into action when you make your first withdrawal. Before then it isn’t active. So even at the end of the year, you’ll still be able to withdraw that annual allowance from your pension, as well as the next year.
If you’ve exceeded you Money Purchase Annual Allowance, you’ll need to do deal with something else. For you, an alternative annual allowance will apply, along with any carry forward. It’s therefore a good idea to stay within your yearly allowance to prevent any hassles for you.
In the UK, the lifetime allowance if currently £1,073,100 for the 20/21 tax year. This amount will most likely increase as inflation rises. So, make sure you stay within that given amount, and you won’t have to pay extra fees for exceeding your limit of withdrawals.
The MPAA2 isn’t so tricky after all. Just know when it’ll apply to you and when it won’t. And remember, PensionBee is always there to help!