Some of the biggest changes to pensions came in April 2015, so we look at the potential impact on contributions to money purchase pensions.
We have previously discussed the trigger events surrounding the introduction of the money purchase annual allowance (MPAA) restriction. Now we will discuss these restrictions in more detail, including when they do and do not apply. The key headlines are:
- A member entering Flexi Access is not always going to trigger the lower (MPAA) funding limits.
- The factsheet entitled “Capped Drawdown, Flexi-access and Triggering the Money Purchase Annual Allowance” discusses the trigger events to Flexi Access as well as those that trigger the MPAA funding limits.
- If MPAA funding limits are triggered in one scheme they are applicable to all the member’s pension schemes and the member will need to notify all other schemes within 91 days.
- The member’s annual allowance remains at £40,000 but only £4,000 can be funded into money purchase (MP) schemes if the MPAA funding limits are triggered.
The Government reduced the MPAA to £4,000 from 6th April 2017 from its previous level of £10,000.
Circumstances where the Money Purchase Annual Allowance is £40,000, examples
- Pre April 2015 capped drawdown with income within 150% GAD limits
- Where a client is in flexi access drawdown and has only taken their tax free cash and no income.
Circumstances where the Money Purchase Annual Allowance is £4,000, examples
- A member takes an uncrystallised pension fund lump sum
- A member enters Flexi Access after April 2015 and takes any income
- A member is in pre April 2015 flexible drawdown
- A member is in capped drawdown and takes income in excess of the allowable 150% GAD limit
- The payment of a stand-alone lump sum and the member has primary protection with a protected lump sum on the certificate.
Money Purchase Annual Allowance tax charge
- Applicable where the member has triggered the flexi access MP contribution restriction and paid in more than the allowable £4,000 into MP scheme in the tax year.
The chargeable amount will be the greater of:
- The total of excess MP contributions over £4,000 plus excess defined benefit (DB) contributions over £36,000, or
- The total of MP and DB contributions over £40,000
Tim is a member of a personal pension scheme and a DB scheme and has accessed some money purchase income ‘flexibly’. He has paid £12k into his personal pension and there is £20k DB pension saving in the tax year. Tim’s annual allowance tax charge is the greater of:
- The excess of £20k over £36k (i.e. nil) plus £12k - £4k = £8k or,
- The excess of £20k plus £12k over the annual allowance of £40k = £0
So Tim will be liable to a tax charge on £8k.
Tapered Annual Allowance
The MPAA will remain at £4,000 when the client is subject to the tapered annual allowance but under these circumstances the alternative annual allowance (defined benefit (DB) contributions) will be reduced. For example, if a client has a tapered annual allowance of £15,000, this will still give the MPAA of £4,000 but a reduced alternative annual allowance DB contributions) of £11,000.
- If a member has never triggered MPAA, carry forward rules will continue to apply.
- Anyone previously in Flexible Drawdown pre 2015 will gain an ongoing annual allowance of £4,000 for money purchase schemes. They will not have access to carry forward for any previous years when they were in Flexible Drawdown.
- If more than £4,000 paid into MP, unused annual allowance will be the difference between £36,000 and the DB contributions made.
However, when carrying forward, a member cannot increase the £4,000 contribution restriction in the current year and so any excess unused carry forward amount can only be paid into a DB scheme.
- If less than £4,000 paid into MP, unused annual allowance will be the difference between £40,000 and the total pension contributions from MP and DB source.
8 July Budget 2015
It was announced on this date that all pension input periods (PIPs) from 6 April 2016 would mirror tax years. To ensure that no people who had already been funding for PIPs ending in tax year 2016/17 were disadvantaged in this transitional year, 2 “mini” PIPs have been introduced for tax year 2015/16. Under these rules any PIP running at that time would end on 8 July 2015 and a new mini PIP would run from 9 July 2015 to 5 April 2016. This could mean a scheme will have 3 PIPs for the tax year 2015/16 (one ending between 6 April 2015 and 8 July 2015, the next starting the day after this PIP end date and running to 8 July and the final one starting on 9 July and ending on 5 April 2016).
- The first mini PIP given for anyone who was subject to the MPAA at this time was given a Money Purchase Annual Allowance of £20,000 rather than £10,000 to allow for anyone who had been funding for their 2016/17 tax year (remember the MPAA was at this time £10,000). The second mini PIP (9 July – 5 April 2016) will have a MPAA of nil. However, they will be able to carry over up to £10,000 from the £20,000 MPAA available in the first mini PIP. The actual amount that can be carried over will be the lower of the £20,000 less any contributions made prior to 9 July 2015 or £10,000. .
Money Purchase Annual Allowance trigger event occurring part way through a year
- MPAA allowance restrictions will apply from the moment they are triggered.
- However, as contributions may have been made previous to the trigger event, these will be ignored for the reduced MP annual allowance restrictions but will still count towards the standard annual allowance.
- These same rules will apply for the transitional MPAA amounts in tax year 2015/16
A member has a PIP running from December 2014 to December 2015 (15/16 tax year). The member pays in a £27,000 contribution in June 2015 and another £8,000 in November 2015.
The member triggers the MPAA annual allowance restriction in October 2015, so applies for the 2015/16 tax year. As the restriction is triggered part way through the year this will only catch MP contributions made after this date.
So for MPAA annual allowance restrictions, the only contribution caught will be that made in November 2015 of £8,000, so it is within the MPAA annual allowance limit.
However, for annual allowance contribution limits, all contributions paid into the PIP ending in the 15/16 tax year will be considered, so in this case this will be the £27,000 and the £8,000, totaling £35,000 total contributions.
These notes are designed to act as guidance only. They are not comprehensive and we suggest these are read in conjunction with all other relevant articles.