Money Purchase Annual Allowance and Small Pension Lump Sums
Published / Last Updated on 09/10/2020
Pension Annual Allowance
The pensions annual allowance is the maximum amount that both you and your employer can pay into a pension fund each year. This is capped at £40,000 or your earnings. If you earn £30,000, the maximum you can pay into a pension scheme each year is £30,000. You cannot pay in more than your earn, although your employer could, if your employment duties are commensurate with this.
Flexible Drawdown for pension funds over £10,000
If you decide to drawdown some or all of a pension fund under flexible rules, 25% is a tax free lump sum and the remaining 75% is taxable.
If you only withdraw the 25% tax free lump sum and do not touch the 75% taxable amount, you keep your full pension annual allowance up to £40,000pa.
If you withdraw the 25% tax free lump sum and then also draw some of the 75% taxable element, even if that is just £1, the pension annual allowance is reduced to £4,000 pa – the Money Purchase Annual Allowance (MPAA). This means that maximum you and your employer could pay into a pension fund each year from then is just £4,000pa.
Small Pension Lump Sums £10,000 or lower
If you decide to take a lump sum withdrawal or even the whole amount for a smaller pension fund worth £10,000 or lower, this does not trigger the reduced MPAA of £4,000pa.
Your keep your main pensions annual allowance of up to £40,000pa.
You can use the Small Pension pot rules up to a maximum of 3 times in your lifetime.
Plan Pension Fund Withdrawals
Given the above, it is worth considering what you work position is, whether you are likely to need to pay more than £4,000pa into a pension in the future. Depending upon the route that you take or the size of the funds that you have, this may affect how and when you decide to draw down pension funds.
