MPAA reduction to be reinstated

Chancellor Philip Hammond unveiled plans in Autumn Statement 2016 to reduce the money purchase annual allowance (MPAA) from £10,000 to £4,000.

This change was scheduled for legislation in Finance Bill 2017, but was 1 of 72 clauses dropped due to the government calling a snap general election on 8 June 2017. 

Mel Stride, financial secretary to the Treasury, has confirmed Finance Bill 2017 will be reintroduced sometime after parliament returns from summer recess in September. 

The revived Bill looks set to include the MPAA reduction, which will affect individuals who have flexibly accessed money purchase pension savings in registered pension schemes.  

The reduction will now apply retrospectively from April 2017.

Sean McCann, chartered financial planner at NFU Mutual, said:

“This has been disastrously handled and it means thousands of people will sleepwalk into a significant tax bill. 

“It’s yet another layer of complexity that will put people off saving for fear of falling foul of the rules.”

What is money purchase annual allowance?

The MPAA is a tax-free savings allowance which applies to individuals who have started transferring money from their pension into another pension scheme – such as a defined benefit scheme.

Pension freedoms were introduced in April 2015, allowing adults from the age of 55 to access 25% of their pension tax-free.

The government hopes the reduction of the allowance would limit the extent to which pension savings can be recycled to take advantage of tax relief, particularly focusing on adults who flexibly access their pension.

Mr McCann, added:

“It’s vital that anyone over 55 who has taken a taxable payment from their pension and is still working takes advice to work out how the change will impact them.”  

Forwarding your previous allowance

As stated in Spring Budget 2017, the way in which MPAA operates will not change and any unused allowance from previous years cannot be carried forward.

The allowance includes all contributions made from both yourself and your employer (in a defined benefit pension) in the tax year.

Exceeding the limit

MPAA is triggered if you access your pension. It is important to note that exceeding your annual allowance would leave you liable for tax on the excess amount. 

This tax will be added to your income for that financial year and charged accordingly at the following rates based on your total annual income and personal allowance (£11,500):

Tax band Tax income Tax rate
Basic rate £11,501 to £45,000 20%
Higher rate £45,001 to £150,000 40%
Additional rate Over £150,000 45%

If you’re concerned about making a contribution to your pension, it would be worthwhile to seek advice to avoid any potential tax implications.

Talk to us about your personal financial planning.