Money purchase annual allowance

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Money purchase annual allowance
  • Introduction
  • The MPAA
  • Triggering the MPAA
  • Tapering of the MPAA

Introduction

The annual allowance in relation to registered pension schemes is the maximum amount:

  • by which a member’s benefits can increase in a pension input period (PIP) (in respect of defined benefit schemes)
  • that can be contributed to pension arrangements in a PIP (for defined contribution or money purchase schemes)

If the annual allowance is exceeded there is a tax charge (the annual allowance charge) on the member.

The purpose of the annual allowance is to set a limit on the extent to which people are able to accumulate additional tax privileged pension funds between one year and the next. So long as these pension inputs do not exceed the annual allowance then tax relief will be granted on the contributions made. Pension inputs in excess of the annual allowance are subject to an annual allowance charge.

The annual allowance is £40,000 from the 2014/15 tax year onwards.

In order to reduce the risk of funds being recycled as a consequence of the introduction of the more flexible benefits regime with effect from 6 April 2015, a new form of annual allowance was introduced for those who have a ‘money purchase arrangement’ (a term defined by Finance Act 2004, s 152(2)) and decide to take benefit in the form of flexi-access drawdown.

The money purchase annual allowance (MPAA) is designed to ensure that individuals do not exploit the flexible pensions system to gain unintended tax advantages. The legislation is set out in the Taxation of Pensions Act 2014, Sch

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