Individuals who flexibly access pension benefits from a money purchase arrangement are subject to a money purchase annual allowance (MPAA) that limits the contributions they can make to money purchase pension arrangements. The money purchase annual allowance (MPAA) was introduced on 6 April 2015 and was based on an amount of £10,000 per year for the 2015/16 and 2016/17 tax years.
HMRC introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the new flexibility rules.
The government announced a reduction in the MPAA limit from £10,000 to £4,000 with effect from 6 April 2017. However, the situation was unclear for a while as the legislation to change this was removed from the Finance Act 2017 due to the last minute general election in June 2017. The government has now confirmed that it still intends to proceed with the reduction to £4,000, and this will apply for the 2017/18 tax year.
The MPAA does not replace the current Annual Allowance rules (or reduce the normal annual allowance of £40,000). It only applies where pension income has been accessed under the new rules, as an Uncrystallised Fund Pension Lump Sum (UFPLS) payment or income from flexi-access drawdown. It does not apply when only tax-free cash has been withdrawn.
Individuals likely to be affected are those who have taken a flexible withdrawal, other than tax-free lump sum, from their pension since April 2015. In many cases, if the individual has retired and is no longer making pension contributions, this is not an issue. However, if the individual is still working and contributions are being made to a pension, either individually or through an employer, then the reduced MPAA may have to be taken into account.
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The value of your investment can go down as well as up and you may not get back as much as you originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.