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There’s a lot of technical jargon in the financial services industry and this can sometimes be confusing for people who want to understand their retirement options. The Money Purchase Annual Allowance is often abbreviated to the MPAA.
I’ll explain what the MPAA is and how it may affect you, and we’ll jump right in with the question:
Generally, the total amount you can contribute into a defined contribution pension is £60,000 in a tax year.
This is the annual allowance, and this £60,000 figure includes tax relief and any contributions made by your employer. If you take any taxable income from your pension, you trigger the Money Purchase Annual Allowance, and this £60,000 figure reduces to £10,000 per annum.
If you’re planning to contribute whilst working or make further pension contributions, triggering the Money Purchase Annual Allowance could have a detrimental impact on your ability to save more for the future and for your retirement.
The MPAA takes effect from the day after you’ve taken your benefits. This means any contributions you’ve made before in the same tax year aren’t affected. Anything going forward will be affected.
With the Annual Allowance, you can use previous three tax years' unused allowances, which should increase the £60,000 figure to £240,000. With the MPAA, this doesn’t allow you to carry forward previous contributions that you haven’t used.
It’s also worth noting that the MPAA is applied to Defined Contribution pensions only, and not Defined Benefit pensions.
It might be possible for you to carry forward unused Annual Allowance to use for other Defined Benefit pensions.
If you’re unsure which type of pension you’ve got, get in touch with the scheme or the pension provider, or speak to a financial adviser who could help you.
The good news is if you take tax-free cash from a pension or you buy a lifetime annuity that provides a guaranteed income for the rest of your life but stays level, that won’t trigger the Money Purchase Annual Allowance.
If you cash a pension in via the small pots rule, for a pension of less than £10,000, that also won’t cause you to trigger the MPAA.
Sometimes people start withdrawing pension income while they’re still working, or while they’re planning to make more contributions. Generally, this is without really knowing what the Money Purchase Annual Allowance is.
These people could have a detrimental impact on their future ability to save more into retirement, and what that might mean to their retirement income going forward.
This usually happens when someone decides to partially retire and still continue in their job part-time, with the intention of building up further pension contributions.
It’s always worth discussing your options with a financial adviser before you commit to withdrawing an income from your pension, especially to make sure that you’re not missing something like the MPAA.
If you have any questions about the MPAA, or would like to suggest another topic for us to cover, please leave a comment below.
You can also get in touch with us at Wealth of Advice if you would like to talk more about the options available to you in retirement, and to get a proper plan in place. We specialise in helping people to reach their retirement goals. Give us a call on 0191 384 1009 or send an email to enquiries@wealthofadvice.co.uk, and we’ll be in touch to help get you on track.
If you want a better view of what your future could be, we'll have a chat over a cup of coffee in our Durham office and work out if we can add any value to your financial picture.
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