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Why the MPAA was never a good idea

4 months ago

Since its introduction in 2016, it is the tapered annual allowance (TAA) which has grabbed all the pension allowance headlines. The crescendo of noise relating to its detrimental effect on our health service eventually resulted in much more generous limits being announced in the March Budget. Now, only the very rich (income above £200,000) can be caught.

The money purchase annual allowance (MPAA) has been a much quieter affair, overshadowed by the limelight-stealing TAA. However, I have recently been working on a new adviser guide on the nitty gritty of the MPAA and it has reminded me of how painful this one can be too.

Now there are calls for the MPAA to be suspended for a period, or scrapped altogether, which could leave my recent work with a very short shelf-life – something I’d happily accept.

The MPAA was introduced to prevent people from recycling income from flexi-access drawdown (or uncrystallised funds pension lump sum (UFPLS) payments) back into their pension to gain further tax-free cash. It was introduced from 6 April 2015 along with the rest of pension freedoms, as a preventative measure. It started at £10,000 before being dropped to £4,000 in 2017/18 (eventually – with lots of confusion, as it was announced but not legislated for until halfway through the year). The reason for the drop was “to focus tax relief where most needed” – though there was no suggestion it was being abused. £4,000 was as low as the allowance could reasonably go without causing issues with auto enrolment contributions.

The MPAA throws up some peculiarities and complexities. It is well known by those regularly dealing with retirees that taking pension commencement lump sums (PCLS) only, taking income under capped drawdown, purchasing a lifetime annuity, or taking a scheme pension will not trigger the MPAA. We know that taking income under flexi-access drawdown (FAD) does trigger it – unless the funds are a disqualifying pension credit following pension sharing on divorce. And it’s these such quirks that can have a significant impact when planning the best strategy in retirement.

There are also some grossly unfair scenarios thrown up. Take someone who went bankrupt prior to 2000 when the changes in the Welfare Reform and Pensions Act 1999 came into force (effectively removing pensions in general from a bankruptcy estate). In this scenario, there could be a Trustee in Bankruptcy (TiB) who has access to the pension once the member turns 55. They will want to recover the monies as soon as possible – ASAP after the 55th birthday. Someone who went bankrupt in their 20s or 30s could now be financially solvent and very likely to want to continue working for some years yet. By definition they will have lost years of their pension so will want to build it up again (in a new arrangement where the TiB has no control). The fact the TiB takes money from one arrangement triggers the MPAA. The formerly-bankrupt saver sees none of this income (or UFPLS) but is prevented from saving more than £4,000 each year in any other money purchase pension schemes for the rest of their life. This hardly seems right.

There are more complexities when it comes to those with both money purchase and defined benefit (DB) pensions. Many believe that the ability to carry forward ceases when benefits are flexibly accessed. This is true in respect of money purchase contributions, but not so for DB accrual.

What’s more, if someone with both types of pension savings exceeds the MPAA, then there’s another allowance to contend with – the lesser known ‘alternative annual allowance (AAA)’ – and more calculations involving the interaction of the MPAA, the AAA and carry-forward.

Another pet hate – and this one’s unique to the MPAA – is the information requirements. These are somewhat unrealistic, with potentially high penalties for unsuspecting pension members.

There are requirements for scheme administrators to tell members when the MPAA is triggered, the implications of this, and what they must do. The bigger issue I have is with the requirement that the members themselves must then provide the relevant information to all other pension providers that they are accruing benefits under within 91 days. They are also expected to remember to tell any other pensions they join at a later date within 91 days of joining. Failure to do so can result in a £300 fine, with further daily penalties of £60.

All of these complexities alone are enough reason to call for the MPAA to be scrapped, before we add in the current situation.

Without the MPAA, someone over 55 wanting to access cash to survive the next few months may be better taking an UFPLS, or maximum income under FAD. This would leave a bigger proportion of their fund uncrystallised to grow as markets recover, and give them a greater PCLS in the future.

However, with the MPAA in place, this has to be weighed up against the fact that they will be severely restricted in replacing the withdrawn funds when they can go back to work. So it could be that they are better off taking a PCLS only and crystallising more of, or all of, their fund.

This is not about recycling – however they withdraw their money – it’s about meeting their immediate needs. The rebuilding which may come as we return to whatever the new normal is will be replacing funds that were never intended to be taken now, but had to be accessed due to exceptional circumstances.

For those without an adviser by their side, these are complex decisions which could be greatly simplified. Let’s hope some common sense prevails and I can tear up my guide.

This article was previously published by Money Marketing.

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Lisa Webster
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Lisa Webster

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Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.

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