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That shrinking feeling: how not to trigger the MPAA

Despite significant protests from the industry, the government has decided to press ahead with its decision to reduce the money purchase annual allowance (MPAA) from £10,000 per year to £4,000 per year starting from 6 April 2017.

This will affect more people wishing to continue to save into a money purchase pension after they have started to take benefits. Most importantly, once the MPAA has been triggered there is no going back.

So, are there any specific actions that advisers should consider in terms of planning?

Well yes, there are a number of options you can explore with your clients to help them retain a higher annual allowance:

  • Taking tax free cash (PCLS) only.  It is taking income (whether regular or a one-off payment) that triggers the MPAA. To avoid this, your clients could crystallise part of their pension pot each year and just take the PCLS. If they do want to continue saving, care must be taken to avoid falling into the recycling trap. 
  • Any clients already taking income via a capped drawdown pension before 6 April 2015, can continue to do so without triggering the MPAA, provided that the amount taken does not exceed the maximum permitted. This maximum is reviewed every 3 years until age 75. It is also possible to transfer into a flexi-access drawdown fund (for example to take advantage of lower charges) and take no income, thus retaining a higher annual allowance. 
  • Small pots - it’s worth investigating to see if one or more small lump sum payments can be taken from a personal pension (PP) scheme. Generally, a small lump sum payment is one that does not exceed £10,000 and it’s possible to have up to 3 such payments (from all PP schemes) without triggering the MPAA. For PP schemes the test is done at arrangement level and some providers will allow the total fund value to be split across more than one arrangement so that a fund value of say, £120,000, could be separated into 4 arrangements of 3 X £10,000, which could all be taken as small pots, plus one of £90,000. Meanwhile, under occupational schemes there is no limit on the number of small pots that can be taken (however there are other conditions to satisfy). An added bonus is that taking a small lump sum payment is not a Benefit Crystallisation Event, so it does not have to be tested against the Lifetime Allowance. This may be useful in reducing any LTA charge.    
  • If a client is receiving payments from a dependant’s flexi access drawdown fund, this does not affect the amount they can pay into their own pension arrangements. 
  • Can the client take funds from other savings, (such as an ISA) rather than touching their pension?  Just because someone has reached their selected retirement age doesn’t mean they have to take their pension. Circumstances are likely to have changed since the SRA was chosen and it now may be more beneficial for them to look at other income options. A holistic view on retirement is becoming more common since the introduction of the pension freedoms as people realise that they can combine pension income with other streams of revenue, or put off taking their pension until they really need it.  They may not want to take it at all if they are planning on leaving it to their descendants, or they may wish to take just PCLS as above and leave the rest invested.

The above options are by no means exhaustive and will very much depend on the individual client’s own circumstances.

There could be many reasons why someone may want to avoid triggering the MPAA, including just keeping options open for future changes in circumstances. Indeed, there seems little point in triggering the MPAA where this can be avoided or delayed, because once it is triggered there is no option to revert back to a higher annual allowance.  Another important consideration is that unused MPAA cannot be carried forward, making it even more difficult to plan for those with varying levels of income e.g. the self-employed. This means that a decision to take pension income, without considering all the options, can drastically reduce the amount of tax-relievable contributions that can be made in the future.

More details on the events that don’t trigger the MPAA.

If you have a client who may be about to trigger the MPAA and would like some help with this, feel free to email us.  

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.