So we had the Pensions Act, Stakeholder Pensions, Pensions Simplification (??), Auto Enrolment and then finally Pensions Freedoms. 

In the UK we do love to mess with our Pensions Legislation and in general how they can work and to be frank,  many individuals have been none the wiser as to what much of these changes were about. 

Most know that Auto Enrolment meant that “if they pay their boss does too” and that Pensions Freedoms meant they could blow their pension fund on that Lamborghini they always hankered for! 

But there were a couple of changes in the Pensions Freedoms that were rather relevant and we have seen that perhaps there could be a call for a bit of clarity on one in particular, the Money Purchase Annual Allowance or MPAA. 

What on earth is the MPAA Niel? 

The MPAA is a cap imposed on pension contributions to money purchase (DC schemes to you and me) when someone draws benefits (in simple terms) 

We all know (or we ought to know) that the current Annual Allowance cap for pension contributions (DC at least) is 100% of earnings to a maximum of £40,000. This is the amount that in total can be paid into any pension for you from any source as contributions (not transfers) and that income tax relief can be granted upon. 

You can pay more than this (if your earnings are £70,000 for example) but only £40,000 will receive income tax relief. All clear so far? Good oh. 

But what happens for those of you who reach age 55 and want to draw benefits and perhaps still work? Let’s remember that on the whole we can draw pension benefits and remain working now, some years ago we had to stop work in order to draw certain pension benefits (the good old works pension) but now we are free to “retire” anytime form age 55 under normal circumstances and still remain in work. 

But what about Auto-enrolment here? Or what if we just want to keep on paying into a pension after this as well as drawing benefits? What happens then? 

Normally when you crystallise benefits (draw them in simple terms) you trigger what is called the Money Purchase Annual Allowance or the MPAA this is a reduced level of maximum contributions that you can make to a pension while drawing benefits, currently it is set at £4,000 a year. 

So you reach 55, draw benefits form a pension and can only pay a maximum of £4,000 into pensions from then on….. 

Only it’s not quite that simple (you kind of knew that it wouldn’t be right?) 

If you do the following you will trigger this much lower annual allowance: 

• Take all of your pension funds as one lump (the good old UFPLS)
• Take smaller UFPLS lump sums
• Enter drawdown and take an income
• Buy an investment linked or flexible annuity
• If you’re already in Capped Drawdown and your payments exceed that cap

BUT you won’t trigger this MPAA if: 

• You take a PCLS only and no other benefits
• You take a PCLS and Lifetime Annuity (level or escalating)
• Cash in under the Small Pots Exemption (£10,000 per pot, maximum 3 pots)
• Remain in Capped Drawdown and don’t exceed the cap

“Hang on” you cry in unison…..what if I do Carry Forward? That allows me to pay more than the regular Annual Allowance. 

They have thought of that too, if the MPAA applies then no luck I’m afraid, you are capped at £4,000 regardless of whether you have Carry Forward potential or not. 

What of DB then? Well I am not going to go into the Tapered Annual Allowance and DB here (it’s complicated and I’ve yet to encounter anyone that used it so far) 

So the message here (as Keith Lemon would say) is that as soon as a client considers taking benefits, especially if they intend to carry on working, best to check what they plan to do about income and contributions and whether the MPAA might apply…..