The Money Purchase Annual Allowance (MPAA) was introduced in the 2014 Pension Act to enable individuals to maximise pension contribution efficiency and to prevent tax avoidance. By following the rules set down by the MPAA you can get the most out of your pension, claim tax relief appropriate to you and avoid unnecessary financial penalties.
The intricacies of the tax world are rarely a subject that an individual wishes to explore by choice. Rules and regulations tend to be quite complex, and it can all seem a bit of a maze if you’re not used to it. Let’s take each factor one at a time – starting with the Money Purchase Pension itself.
If you are employed in the UK, it’s mandatory for your employer to arrange a pension scheme for you, provided you are 22 or over and earning at least £10,000. This is called a direct contribution scheme or more commonly a Money Purchase Pension plan.
As this scheme is provided through your workplace, your employer will contribute 3% towards it and the government will also give you tax relief. Contributions are then invested in the stock market, and you receive the financial benefits at retirement. Or you can access money from your pension from the age of 55 thanks to the 2015 Pension Freedoms Act.
Releasing pension money early isn’t right for everyone as it will leave you worse off in retirement.
A private pension is a great way to save for your long-term future. Arguably the most attractive benefit is the tax relief, which you receive on any contributions you make. This is where you get back the income tax you would have already paid on that money.
In effect, this means the government is giving you money to save for your retirement. The one factor to bear in mind is that once you have accessed funds from your Money Purchase Pension you are only allowed a limited amount of tax-free cash.
Tax relief on pension contributions can be an incentive to save but there also has to be a limit on how much tax relief you receive in any one year. The Money Purchase Annual Allowance sets that limit.
The MPAA is the amount you and your employer can continue to contribute to your pension fund, after you have started to access it, while still receiving tax relief. The allowance is currently set at £4000 (2021/22).
Before 2015 you could not access your private pension fund before retirement without facing some form of financial penalty. Since 2015 when the government introduced the Pension Freedoms Act, there have been many different ways to access your pension fund from the age of 55.
If you are looking to find out what options are right for you, the best thing to do is speak with a financial adviser. By looking at your needs and circumstances, they can help you to know what options are available to you.
AA (Annual Allowance) refers to the amount of contributions you can make to your Money Purchase Pension Plan (and receive tax relief) in any one year. This limit currently stands at £60,000. After you start accessing the taxable portion of your pension fund, the MPAA is triggered, and the allowance is reduced to £4000.
The answer to this question is, unfortunately, yes. If you exceed the MPAA you will incur a tax charge. The amount by which you have exceeded your allowance gets added to your taxable income. In this way your yearly tax bill could increase. Also, be aware that it may force you into a higher income tax bracket.
If you have started to access your pension and are still making contributions, it is a good idea to speak with a financial adviser. They can help you manage your money to avoid these tax charges.
If you are able to access your pension as you approach retirement you can use those funds to invest in other ways, such as to pay off debts, or fund home improvements. A benefit not to be missed if your pension allows for it. Because accessing your pension and keeping an eye on your MPAA needs caution, we recommend you speak to one of our pension experts before going ahead. This way, you will learn the best way to manage your pension and have support when understanding the complex tax rules.
We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.