Beware the pitfalls of the MPAA

Posted 7 March 2023 by Neil MacGillivray

The money purchase annual allowance (MPAA) became a consideration from the start of the 2015/16 tax year to prevent abuse of the pension freedoms introduced around the same time.

The MPAA is triggered when benefits are first flexibly accessed from a money purchase (MP) arrangement, for example, the payment of an uncrystallised fund pension lump sum (UFPLS).

Where it has been triggered, the first step is to total the pension input amount (PIA) from all MP arrangements held by the individual.  In the tax year in which the MPAA is triggered, this total is the PIA generated after the trigger date.

If it doesn’t exceed the MPAA (currently £4,000), then the PIA from all arrangements held by the individual, including any that are defined benefit (DB), is totalled and compared against the annual allowance (AA) plus any unused AA from the three previous tax years.

Any excess is referred to as the ‘default chargeable amount’ and the AA charge is based on this amount.

However, if under the first step the total for the tax year exceeds the MPAA, the individual will have an AA charge to account for.

The AA test is modified, as well as calculating the default chargeable amount (if any), the ‘alternative chargeable amount’ is also calculated. Where the alternative chargeable amount is greater, the AA charge is based on the alternative chargeable amount, otherwise the default chargeable amount is used.

The alternative chargeable amount is the sum of two excesses:

DB excess = DBIST – alternative AA (currently £36,000) plus any unused AA

If less than zero, the DB excess is nil.

MP excess = MPIST – MPAA

DBIST is the ‘defined benefit input sub-total’. It includes any DB PIA for the tax year and, in the tax year in which the MPAA is triggered, any MP PIA generated from the start of the tax year up to and including the trigger date.

MPIST is the ‘money purchase input sub-total’ and is the MP PIA generated in the tax year after the trigger date.

Case study

Dick and Betty are a married couple in their late fifties. Dick is a self-employed entrepreneur with minimal pension savings. Betty has substantial pension savings.

Betty is currently a member of a Group PP (GPP) into which she and her employer contribute.

Dick has a poor credit rating and securing loans is difficult for him. In the 2020/21 tax year, Betty took an UFPLS from a small paid-up Sipp she had to provide Dick with funds for a business venture.

Tapering of the AA isn’t an issue for Betty.

Gross contributions to GPP in 2020/21 = £18,000

Gross contributions to GPP in 2021/22 = £18,600

Trigger date for MPAA was 14 February 2021 (payment date for UFPLS) and table below summarises Betty’s pension savings:

Tax year

PIA

MPIST

DBIST

2020/21

£18,000

£3,000

£15,000

2021/22

£18,600

£18,600

Nil

Betty has no DB pension savings.

However, in 2020/21, her MP PIA in the period 6 April 2020 up to and including 14 February 2021, made up of the total contributions paid in respect of her during that period, forms part of the DBIST. The contributions made after 14 February 2021 up to and including 5 April 2021 make up the MPIST for 2020/21.

For 2021/22, as the MPAA trigger date happened in the previous tax year, the total MP PIA is included in the MPIST. DBIST for 2020/21 is nil because no DB funding occurred in that tax year.

2020/21: The MPIST (£3,000) didn’t exceed the MPAA (£4,000). Therefore, the AA test is carried out on the default basis and the PIA (£18,000) is less than the AA (£40,000). There’s no chargeable amount and Betty has no AA charge liability for the tax year.

2021/22: The MPIST (£18,600) did exceed the MPAA (£4,000) for the tax year. Therefore, the modified AA test applies.

£18,600 is less than £40,, therefore the default chargeable amount is nil.

Alternative chargeable amount = DB excess + MP excess

DB excess = 0

MP excess = £18,600 – £4,000 = £14,600

Alternative chargeable amount = £14,6000 > default chargeable amount

Therefore, for 2021/22 Betty is liable for an AA charge on a chargeable amount of £14,600.

The MPAA is an issue for people who continue to fund MP arrangements after flexibly accessing benefits from such an arrangement. As the case study illustrates, accessing benefits flexibly with the best of intentions can have implications for the tax efficiency of future pension savings.

A sharp reminder of the many pitfalls lurking within pension tax legislation for those whose knowledge is not up to scratch.

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Neil MacGillivray

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Neil MacGillivray