Money purchase annual allowance (MPAA) - Case studies

Case studies demonstrating how the MPAA works for a selection of tax years.

How Money Purchase Annual Allowance works

Please read our article Money purchase annual allowance (MPAA) - facts.

Case study 1: Defined contribution inputs in the same tax year as the trigger

David has a personal pension and he has no available carry forward. For the pension input period (PIP) ending at the end of this tax year David has contributed £70,000 to his pension.

David contributes £30,000, prior to accessing flexibility, by making an Uncrystallised Funds Pension Lump Sum (UFPLS). This triggers the Money Purchase Annual Allowance. The UFPLS is withdrawn on 1 May.

Following this, a further £40,000 is contributed to the personal pension. In order to calculate the chargeable amount there is a 5 step calculation to go through. 

1. Calculate the chargeable amount on the Money Purchase Input Sub-Total
£40,000 (post trigger input) - £10,000
MPIST chargeable amount = £30,000

2. Calculate the Defined Benefit Input Sub-Total
£0 + £30,000 (pre trigger input) - (£50,000 or the relevant lower amount should the tapered annual allowance apply + £0)
DBIST chargeable amount = £0

3. Calculate the Alternative Chargeable Amount
Step 1 result + Step 2 result
£30,000 + £0
ACA = £30,000

4. Calculate the Default Chargeable Amount
£70,000 - £60,000 or the relevant lower amount should the tapered annual allowance apply
DCA = £10,000

5. Identify the Chargeable Amount
Higher of ACA and DCA
Chargeable Amount = £30,000.

Case study 2: Defined benefit & Defined contribution inputs in the same tax year as the trigger

Estelle had a trigger event last tax year and she has the added complication of defined benefit inputs as well as defined contributions using up her annual allowance.

Estelle was earning £30,000pa working part-time for an employer with a non-contributory defined benefits pension scheme. On 1 September she increased her hours to full-time working and, because of this sharp increase in pensionable pay, her pension input amount is larger than normal, at £16,000. 

Estelle also works on contracts arranged with her own Limited company. She takes no salary but pays herself a monthly pension contribution of £2,000 on the 1st of each month.

To supplement her, formerly part-time, income she has a capped drawdown arrangement from which she takes £1,250pm (£15,000pa).  Estelle’s maximum GAD reduced to £14,000. However, Estelle asked her provider to maintain her income at £1,250pm. To achieve this, the arrangement was converted from capped to flexi-access drawdown immediately before the payment of £1,250 made on 4 July. This payment triggered the MPAA.

This is similar to case study two in that we need to look at the standard annual allowance rules, but this time we look at the total of the defined benefit pension input amount (DBPIA) plus the value of money purchase contributions paid before the MPAA trigger date of 4 July, and then the MPAA rules for any DC contributions paid after that date.

The DBPIA is £16,000. Monthly contributions were paid on 1st May, June and July, so 3 x £2,000 = £6,000. A total of £22,000 is tested against the standard AA of £60,000 less the MPAA limit of £10,000 where this has been used. Estelle is not affected by a tapered annual allowance or else it would be used instead of the standard AA figure. £22,000 is less than £50,000 so there is no excess amount at this point.

Monthly contributions continued to be paid between 1st August and 1st April inclusive, adding up to 9 x £2,000 = £18,000. This exceeded the MPAA limit of £10,000 and gave an MPAA excess of £8,000.

Estelle would have been able to avoid an MPAA excess had she stopped employer pension contributions after the one paid on 1st September. Her DBPIA amount does not count towards the £10,000 limit. She could have looked at other ways of extracting her company profits tax efficiently and we have an article (The best ways to extract profits from your business) and a calculator tool to help with this.

Case study 3: Defined contribution inputs in a tax year after the trigger

Jack first accessed flexible benefits 2 tax years ago.

Following an illness in June three tax years ago he needed an extended time off work. A year later his salary (usually £80,000 p.a.) stopped, replaced with a smaller amount of sick pay. He took an uncrystallised funds pension lump sum (UFPLS) to maintain his mortgage payments and other household bills.

At the start of last tax year he fully recovered and returned to work. Both Jack and his employer resumed contributions to the company’s defined contribution pension scheme which, taking into account all contributions equates to 15% of salary (£12,000 p.a.). The previously paid UFPLS payment triggered the MPAA which means Jack has the MPAA limit of £10,000 for all DC inputs in the last tax year. Remember you cannot use carry forward to increase this limit.

This gave Jack an annual allowance excess of £2,000 last tax year which he must report through self-assessment leading to a minimum tax charge (the rate for the tax charge depends on total taxable income) of 40% of this ie £800 to pay by 31 January this tax year.

Conclusion

Overall, these rules are positive as they allow those who have accessed flexibility to continue to benefit from pension contributions; compared to the previous “Flexible Drawdown” (replaced by Flexi-access drawdown in April 2015) rules where the annual allowance was zero. This is particularly important given changing retirement patterns and the fact that it is now common for pension contributions to continue after initial crystallisation. A continuation of the previous zero AA would have resulted in issues in future. However, the reduction in MPAA could impact those who access benefits flexibly and then belong to a pension scheme where the employer pays more than the minimum required by auto-enrolment.

It is crucial that clients who intend to flexibly access retirement benefits are fully aware of the MPAA and how it will affect any future pension savings they are planning. The MPAA limit may seem to work against individuals who have the means and the will to save for their own retirement, however, where it applies, it reduces the cost to the Treasury of pensions tax relief.