Money purchase annual allowance

If you start to flexibly access your pension, including your SIPP, you will trigger the money purchase annual allowance (MPAA). This allowance is £10,000.

This means you will only be able to contribute up to £10,000 to all money purchase pensions each year, including your AJ Bell-provided SIPP for tax relief purposes. Additionally, it is not possible to make use of any unused contribution allowance (known as carry forward) from previous tax years to increase this amount.

A money purchase or defined contribution pension is one in which you build up a pot of money that you can use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you get will depend on factors including the amount you pay in and the fund’s investment.

The overall annual allowance still applies.  So if you also have a defined benefit scheme (this may be referred to as a final salary or career average scheme) you can continue to accrue benefits worth up to £60,000 a year in total, plus any unused allowance from the previous tax years, across all your pensions without facing tax charges. But the amount that is contributed to all your money purchase pensions must not exceed £10,000 or you’ll have to pay tax charges.

How do I know if I will be affected by the MPAA?

You WILL be affected by this allowance when you: You WILL NOT be affected by this allowance if you:
  • take any benefits flexibly from your pension
  • exceed your income limit in capped drawdown
  • take an income payment after you have told your scheme administrator you want to move from capped drawdown to flexi-access drawdown
  • purchase a flexible annuity that allows income to decrease
  • have been taking flexible drawdown before 6 April 2015
  • take a tax-free lump sum but no other income
  • continue to take income below your annual limit in capped drawdown
  • purchase a traditional lifetime annuity
  • take a lump sum or income as a beneficiary of someone else’s pension

Case study: Emily Smalling, 58, works as a dentist (NHS and private)

Emily

Emily has £100,000 invested in a SIPP and is also a member of a NHS pension scheme. She wants to help her son with a deposit for his first house and so is looking to take a lump sum of £30,000 from her SIPP. She is still working and wants to continue to make contributions into her SIPP and is continuing to accrue benefits in the NHS scheme.

When she takes out the £30,000 the money purchase annual allowance will be triggered because she has withdrawn more than the 25% tax free element of her SIPP and has flexibly accessed her benefits. She will now only be able to contribute a maximum of £10,000 per annum into her SIPP. However it does not affect the benefits she can accrue in her defined benefit NHS scheme. She can still accrue benefits of up to £60,000 each tax year in total, plus any available carry forward, as long as she doesn’t contribute more than £10,000 in a tax year into her SIPP.

Had Emily only needed £25,000 to help her son she could have taken this as a tax-free lump sum and this would not have triggered the money purchase annual allowance.