Section 3 - The Annual Allowance And The Money Purchase Annual Allowance Flashcards
Define the annual allowance and its features
• Maximum annual benefit or total pension input allowed without incurring a tax charge
• Tax charge at marginal rate of income for tax on excess contributions
Scheme member is liable for charge/through self-assessment
• Annual allowance:
- for 24/25 it’s £60,000
- Tapered for those with adjusted income’ of E260,000 or more - to a minimum of
£10,000
- £1 for every £2 of adjusted income over £260,000 (does not apply if threshold income is not more than £200,000)
Define the Money purchase annual allowance and its features
The money purchase annual allowance (MPAA) rules are designed to work with the annual allowance rules to ensure that individuals cannot abuse the pension flexibilities. Where the MPAA rules are triggered the member will have a reduced annual allowance imposed for defined contribution savings.
• Reduced annual allowance of £10,000 for DC schemes
• Triggered on certain events
On what amount is a member entitled to tax relief
• A member is entitled to tax relief on greater of £3,600 or relevant UK
earnings
• Even if this is over the annual allowance or MPAA
• Annual allowance or MPAA is only considered when tax return submitted
• Then annual allowance or MPAA is used to see if person can keep all the tax relief
• Or whether some must be returned in the form of an annual allowance tax charge
What is a pension input period (PIP)
• When testing pension savings against annual allowance, input for all pensions for the tax year is used
• Since 6 April 2016 all PIPs run between 6 April and 5 April each year
• Amount compared to annual allowance to see if an annual allowance tax charge applies
What is Total pension input
• Amount of contributions (or accrual of benefit) tested against annual allowance
- calculated according to the type of scheme
Exclusions are
• Contributions and DB accrual in year of member’s death
• Contributions and DB accrual in year benefits are taken due to severe ill-health
• Investment growth in DC schemes
How is total pension input calculated for a DC Scheme
• Gross amount of pension contributions paid by member or their employer or someone else on behalf of the member
• Includes any part that does not get tax relief
• Not included:
- Contributions paid by individual or someone other than the employer after age 75
- Investment income or returns
• The calculation is done at the end of the PIP
• Entered on self-assessment tax return to see if annual allowance tax charge is due
How is total pension input calculated for a DB Scheme
For active members, total pension input is increase in capital value of the individual’s rights over the PIP Calculated as follows:
• Calculate the value of benefits at the start of the PIP
• This is the opening pension input value
• Multiply this by 16
• Any lump sum is added but not multiplied by 16
• Increase this by CP| - for 2024/25 this is based on the figure for September
2023 of 6.7%
• Calculate the benefits at the end of the PIP
• This is the closing pension input value
• Multiply by 16
Any lump sum is added but not multiplied by 16
• Do not increase by CP as this value is already in today’s terms
• Difference between the two figures is the total pension input for the combined period
What is a cash balance scheme
A mix between a DB and DC scheme
Annual allowance
• The maximum amount of ‘benefit’ or ‘total pension input’ that can build up
• If exceeded, annual allowance charge is paid
• At the highest marginal rate of the individual
• £60,000 in 2024/25
• If employer contributes to pension on employee’s behalf in excess of annual allowance, employee is subject to tax charge not the employer (they should still get tax relief).
How does the tapering of annual allowance work
• The annual allowance is tapered for high earners
• For those with an adjusted income of £260,000 or more
• £1 for every £2 to a minimum of £10,000
• A person with a threshold income of below £200,000 is not subject to the taper
• Only applies where someone has threshold income of more than £200,000 and adjusted income is more than £260,000
• Note that between April 2016 and April 2020, the adjusted income figure was £150,000, the threshold income figure was £110,000 and the floor was £10,000
• From April 2020 to April 2023, the adjusted income figure was £240,000, the threshold income figure was £200,000 and the floor was £4,000
• First establish gross taxable income - add together all sources of income chargeable to income tax
• To calculate threshold income: from gross taxable income deduct member’s gross pension contributions (paid via net pay or relief at source or by a third party but NOT by the employer) + any income given up via salary sacrifice/flexible remuneration exercise on or after 8 July 2015 minus any lump sum death benefits taxed as pension income
• If this figure is more than £200,000 then need to calculate adjusted income
• Adjusted income is gross taxable income PLUS any employer contributions less any taxed lump sum death benefits.
• If this figure is greater than £260,000 the annual allowance is tapered
• If it is less, no tapering
How does the carrying forward of annual allowance work
• Able to carry forward unused annual allowance from up to three previous tax years
• If member (i.e., active, pensioner, deferred, pension credit member) of a scheme in that year
• i.e. 2021/22, 2022/23 and 2023/24 for c/f in 2024/25
• The current year annual allowance must be used first
• Carry forward only relevant if current year pension input is more than £60,000 (or tapered annual allowance if this applies)
• Carry forward uses up any unused annual allowance from earliest carry forward year first
• For 2024/25 the unused annual allowance from 2021/22 is used up first
• Where input in one or more of the previous three tax years was more than the annual allowance for that year, will need to look back a further 3 years to see what unused relief was available.
What is the Money purchase annual allowance
•Once an event is triggered, subject to MPAA for all subsequent DC pension input
• The MPAA is £10,000 for 2024/25
• Two possible scenarios: input is less than or equal to £10,000, or greater than
£10,000
The money purchase annual allowance (MPAA) rules are designed to work with the annual allowance rules to ensure that individuals cannot abuse the pension flexibilities. Where the MPAA rules are triggered the member will have a reduced annual allowance imposed for defined contribution savings. For 2024/25 the MPAA is £10,000 p.a., as it was in 2015/16 and 2016/17. Between 2017/18 and 2022/23 the MPAA was £4,000 p.a. and it was increased back up to £10,000 from 2023/24.
• Only applies to those who have flexibly accessed their DC pension funds
• Once the MPAA is triggered it applies to all future tax years.
What events trigger MPAA
When the member:
• takes income from a flexi-access drawdown fund
• takes an uncrystallised funds pension lump sum (UFPLS)
• intends to convert capped drawdown fund to flexi-access and takes an income • takes more than allowed maximum from a capped drawdown fund
• receives a stand-alone sum when entitled to primary protection where the lump sum protection is more than £375,000
• receives a payment from a flexible annuity contract
• receives a scheme pension directly from DC funds which is paying to less than 11 other members
• has a payment of one of the above benefits from an overseas scheme that has received tax relief
MPAA is not triggered in which events
• a PCLS
• a trivial commutation lump sum/small pots lump sum
• payment from a scheme pension from a DB Scheme
• payment from a DC scheme where at least 11 other people (including dependants) are receiving a pension directly from scheme funds
● an annuity from a DC scheme
• a lifetime annuity where payments cannot go down except in specific circumstances
• no more than the allowed amount from a pre-6 April 2015 capped fund
• payment from a dependant or nominee or successor FAD fund
In the scenario where MPAA is triggered and pension input into DC scheme is less than or equal to £10,000 what is the outcome
The total annual allowance is maximum of £60,000 including the MPAA used
(Where taper applies the annual allowance is less than £60,000 but can’t be less than £10,000)
Possible to carry forward unused allowance from previous three tax years but only in respect of DB input and any unused MPAA cannot be carried forward to later tax years
