Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Will I trigger the MPAA if I buy an annuity?
Will I trigger the MPAA if I buy an annuity? And are there any other ways I can avoid it?
Tom Selby, AJ Bell Senior Analyst says:
The money purchase annual allowance (MPAA) is triggered when you ‘flexibly access’ your pension from age 55, reducing the amount you can save in a pension each year from £40,000 to £4,000 (inclusive of tax relief).
The term ‘flexibly access’ covers two main types of pension withdrawal:
Making a taxable withdrawal via ‘flexi-access’ drawdown;
Taking an ad-hoc lump sum from your pension, where 25% is tax-free and the rest taxed in the same way as income (sometimes referred to as a ‘UFPLS’ withdrawal).
Note that if you just take your 25% tax-free cash when entering drawdown but leave the taxable portion of the fund untouched, you will not trigger the MPAA. The same is true if you buy a lifetime annuity – a product paying a guaranteed income for life – from an insurance company.
However, not all annuities are the same and some will trigger the MPAA. The main one to note is an ‘investment-linked’ annuity, where the income you receive is not guaranteed.
While flexibly accessing your pension will see your annual allowance reduced by the MPAA, there are ‘small pots’ rules which allow you to make taxable withdrawals while retaining your full annual allowance.
A small pot in this case is defined as a pension worth £10,000 or less. In order to class as a small pots withdrawal (and thus avoid triggering the MPAA), you must extinguish the entire fund you are accessing.
You can make unlimited small pots withdrawals from any occupational defined contribution (DC) pension plans worth £10,000 or less. These are simply any pensions you may have which were set up by an employer.
For non-occupational DC plans such as SIPPs, you can make a maximum of three small pots withdrawals.
Finally, if you entered ‘capped drawdown’ before 6 April 2015 and stay within your income limits you will not trigger the MPAA.
Savers in capped drawdown have their fund invested and take withdrawals from their fund in the same way as regular drawdown. However, the key difference is that withdrawals are capped at 150% of the equivalent Government Actuary’s Department (GAD) annuity rate.
Although this might sound complicated, it just means you can withdraw up to 150% of the income a healthy person at your age could receive from a guaranteed annuity. If you breach this limit, then you will have been deemed to have flexibly accessed your pension and so will trigger the MPAA.
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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.