Neil MacGillivray: Riding to the rescue after triggering the MPAA

"Woah, trigger!" exclaims Neil MacGillivray, who uses a real-life case study to assess the common ways savers can trigger the MPAA and details how advisers can help clients sidestep accidentally incurring the tax charge

The recent finding by the Financial Ombudsman Service in favour of a client who triggered the money purchase annual allowance (MPAA) and subsequently incurred a tax liability due to the pension advice given, perhaps merits revisiting the common triggers for the MPAA.

The MPAA came into effect from 6 April 2015 with the stated aim of ending the exercise of individuals withdrawing funds from money purchase arrangements and then recycling them back into a pension.

Personally, I’ve never really understood the rationale for this piece of legislation being introduced, as existing legislation potentially caught such action in the form of recycling of the pension commencement lump sum (PCLS). The recycling legislation isn’t just restricted to re-investing specific money from the PCLS but also includes certain increases in pension savings in the years pre- and post-PCLS withdrawal.

The MPAA applies when an individual first flexibly accesses a money purchase arrangement on or after 6 April 2015. A trigger event determines when the individual first flexibly accessed an arrangement, and the MPAA will apply for the tax year in which the event occurs and in subsequent tax years.

The MPAA affects future savings into other money purchase arrangements, therefore bear in mind, in situations where the individual is a member of a defined benefit arrangement, they can still possibly have the full £40,000 annual allowance.

There are seven triggers for the MPAA but, of them, the three most common are probably:

  • payment made from a flexi-access drawdown fund, including a short-term annuity
  • payment that exceeds that annual maximum applicable under a capped drawdown arrangement, and
  • payment of an uncrystallised funds pension lump sum (UFPLS).

The seven events are not just restricted to UK money purchase arrangements but also include payments made from:

  • a qualifying recognised overseas pension scheme to which the individual has transferred benefits, or
  • an overseas pension scheme in respect of which UK tax relief has been given for benefits provided under the scheme in respect of the individual.

Taking just a PCLS itself is not a trigger, and neither are taking income from a disqualifying pension credit or income from a dependant’s or nominee’s flexi-access.

When a trigger event occurs, a scheme administrator (SA), or overseas scheme manager, must provide the individual with a flexible access statement, and the individual must then notify the other schemes where they are an active member that they have received a flexible access statement. The SA must provide the statement within 31 days beginning with the date of one of the trigger events.

If the individual subsequently joins a new scheme, then unless they joined that scheme by transferring in an existing pension, or the scheme provides defined benefits only, they must notify the new SA or manager that they are subject to the MPAA.

As with many things pension tax-related, if the individual is not conversant with the detail, then it is all too easy to quickly come unstuck. I’ve certainly come across scenarios in discussions with adviser, where an unadvised individual held an old-style contract and the only option was a PCLS and an annuity, and rather than take the income benefit in that form, due to poor annuity rates, they opted instead for an UFPLS, little realising they will have triggered the MPAA as a result.

When the MPAA was £10,000, such action probably had little impact. I seem to recall a statistic from the Office of National Statistics around the time indicating that around 97% of people funding a pension paid in £10,000 or less.

The subsequent reduction from the 2017/18 tax year to £4,000 is a different matter altogether, for on a matching funding basis of 6% for employee and employer, any pensionable salary in excess of £33,333 produces a pension input amount in excess of £4,000.

Clients in such circumstances should naturally seek advice before taking action, but of equal importance, advisers need to ensure they ask pertinent questions, because Roy Rogers certainly won’t be riding over the hill to the rescue!

Neil MacGillivray is head of technical support at James Hay