A number of factors, including the Annual Allowance (AA), govern the amount of contributions to an individual’s pension schemes in any tax year that could be eligible for tax relief, and individuals should seek advice before contributions are paid.

However, there are a number of events that will trigger a reduction in an individual’s Annual Allowance in each tax year to £4,000 for contributions to money purchase pension schemes (e.g. SIPPs and SSASs), known as the money purchase annual allowance (MPAA). One such event is the first drawing of flexi-access income.

The triggering of the money purchase annual allowance also removes the ability to carry forward any unused contribution allowances from previous years. 

The trigger events are: 

  • Drawing an income under flexi-access drawdown.
  • Drawing an income whilst in capped drawdown that is in excess of the calculated maximum. (Please note that capped drawdown is only available if you were already in capped drawdown as at 5th April 2015).
  • Drawing benefits from any pension arrangement as an Uncrystallised Funds Pension Lump Sum (UFPLS).   
  • Where a stand-alone lump sum is paid and the member holds Primary Protection (against the Lifetime Allowance) and had entitlement to a tax-free lump sum is greater than £375,000 as at 5 April 2006.

There are instances where the money purchase annual allowance will already apply where: 

  • The member was drawing income using existing flexible drawdown before 6 April 2015.
  • A flexible annuity has been purchased on or after 6 April 2015 and income levels vary beyond permitted levels.
  • The member commenced a ’scheme pension’ from a money purchase scheme with fewer than 12 members entitled to draw scheme pension.

It is important to remember that the money purchase annual allowance will only apply from the date of the first trigger event, which means that any contributions paid in the same tax year before the trigger event occurred are not affected. 

If you would like to find out more about this topic please contact your Financial Adviser or alternatively your Pension Consultant