What is the 2018/19 Money Purchase Annual Allowance?

If you have started taking money from your Pension, it doesn’t automatically mean that you have to stop investing into your pot. You can still make contributions to a pension and earn tax relief.

However, you will have a lower annual allowance if you want to make further contributions, and this is known as the Money Purchase Annual Allowance. In the 2018/19 tax year, this is set at £4,000.

While this is much lower than the pre-withdrawal Pension Annual Allowance, it is still a useful way to make your money do more through tax relief on contributions up to £4,000.

If you haven’t started taking money from your Pension, you’ll have the Pension Annual Allowance giving you tax relief on contributions up to £40,000 in the 2018/19 tax year.

Although the Money Purchase Allowance is only £4,000, this is still a useful and tax efficient way to grow your money.

You’ll trigger the Money Purchase Allowance when you take a lump sum from your pension (an uncrystallised pension lump sum), or when you begin taking an income from your pension through income drawdown. It is possible to keep the full annual allowance of £40,000 if you take 25% tax free lump sum or buy an annuity or start a drawdown plan without taking an income.

Something to keep in mind once you’ve triggered the Money Purchase Allowance is that you can’t carry forward any unused allowances from previous years. Use as much of your £4,000 allowance as you can to ensure you’re getting the most out of tax efficiency on your money.

Situations where you’ll trigger the MPAA

• Taking your entire pension pot as a lump sum or taking ad-hoc lump sums from your pension pot
• Putting your pension pot money into a flexi-access drawdown scheme and starting to take income
• Buying an investment-linked or flexible annuity where your income could go down
• If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap

Situations where you won’t normally trigger the MPAA

• Taking a tax-free cash lump sum and buying a lifetime annuity that provides a guaranteed income for life that either stays level or increases
• Taking a tax-free cash lump sum and putting your pension pot into a flexi-access drawdown scheme but not taking any income from it
• Cash in small pension pots worth less than £10,000.