I’m confused about what the ‘money purchase annual allowance’ means for my NHS pension.
I have a small private pension of £38,000 which I want to cash in. I am presently paying in to my NHS pension at least for another three years. I have both a 1995 and 2015 NHS pension.
If I cash in my private pension does this mean that it will affect how much I will get from my NHS pension when I retire due to the MPAA?
Retirement planning: How will my NHS pension be affected if I trigger the ‘MPAA’ on my private pension?
I’m quite quite confused about the MPAA and it was suggested when I contacted my private pension company I would pay more tax and have lower monthly pension payments and a lower lump sum from my NHS pension if I cash in my private pension.
Can you explain about the MPAA and if cashing in my private pension will affect my NHS pension?
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Steve Webb replies: Although I’ve written about the ‘money purchase annual allowance’ before, it’s worth a reminder about what it is, particularly at a time when money pressures may be leading people to think about tapping into their pensions for the first time.
This column will cover the main features of the rules but there are always special cases and exceptions, so it is worth getting something in writing from your scheme before making big decisions.
Under the current system of pension tax relief, each year you have a basic annual allowance of £40,000.
This means that up to £40,000 can go into your pension pot and you can enjoy full tax relief on your contribution.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
Note that for pensions where tax relief is added to the pension fund ‘at source’ (in a transaction between HMRC and your pension fund), the £40,000 limit includes any basic rate tax relief which is added.
This means that the individual can pay in up to £32,000 and benefit from up to £8,000 of basic rate relief from HMRC. If they are a higher rate taxpayer, they can use their tax return to claim the extra tax relief on their £32,000 contribution.
However, in certain situations the annual allowance is reduced.
For the very highest earners, the limit can be reduced on a sliding scale to as little as £4,000.
And when someone uses ‘pension freedoms’ to flexibly access their pension pot this can also affect their annual allowancee.
In this case, the MPAA may be triggered, and this currently stands at a flat £4,000.
However, it is important to be clear about two things – what does and does not trigger the MPAA, and what the MPAA does and does not apply to.
1. What triggers the MPAA?
When people use pension freedoms to flexibly access their pension pot, beyond simply taking a tax free lump sum, they trigger the MPAA.
Purely taking a tax free lump sum, and leaving the remainder of the pot to grow does not trigger the MPAA, and nor does using your pension pot to buy a regular annuity or income for life.
Cashing out a very small pension pot (under £10,000) also does not trigger the MPAA, and neither does taking pure salary-related benefits such as a lump sum or regular pension from a defined benefit pension.
But if the defined benefit pension has a separate defined contribution element or has scope for ‘additional voluntary contributions’, taking a chunk of taxable cash from those parts would trigger the MPAA.
2. What does the MPAA apply to?
The crucial words here are ‘money purchase’. A money purchase pension is basically a ‘pot of money’ arrangement, sometimes known as a defined contribution pension. This is distinct from a defined benefit or salary-related pension.
When you trigger the MPAA, the tax-relieved contributions you can make into a *money purchase* arrangement are capped at £4,000 per year.
But this does not stop you paying money into a defined benefit pension – such as your NHS pension. And it has no bearing on the amount of NHS pension that is eventually paid out to you in years to come.
The MPAA is important to be aware of for people who, for example, need cash now (perhaps following redundancy) but who hope to be in a position to start saving again in future into a money purchase pension.
This group should be very careful about triggering the MPAA now, as in future years no more than £4,000 a year will be allowable by way of tax-relieved contributions into a money purchase pension.
But taking a lump of flexible pension cash should have no bearing on your future ability to build up an NHS pension or other salary-related pension.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected]
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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