Reduced Money Purchase Annual Allowance
The MPAA applies to individuals who have flexibly accessed their pension benefits and were introduced to stop abuse of the pension system under certain circumstances. The annual allowance that applies in respect of money purchase pension contributions is to be reduced from £10,000 to £4,000 from 6 April 2017. This measure has been put in place to prevent inappropriate ‘double tax relief’ by those aged 55 and over who have already taken money from their pension pots.
The MPAA effectively stops an individual using the flexibilities by accessing a money purchase pension arrangement to divert their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax-free. The MPAA only applies to money purchase contributions.
This change reduces the amount of pension savings that can be recycled to take advantage of tax relief, which is not within the spirit of the new flexible pension rules. However, the change severely limits options for those who have already started drawing a pension to add more than £4,000 per year to their pension pots.