Will claiming state and final salary pensions when I’m 65 affect my money purchase annual allowance?

David Wesley-Yates
12 September 2018

Q

Reading the Ask the Experts section in April 2018 I was surprised to see David Wesley-Yates’ answer to the question: “How much can I invest in a self-invested personal pension (Sipp) that I have not yet used in retirement?”

David says that if you have only accessed an income from your defined benefit pension, it does not trigger the money purchase annual allowance (MPAA). My understanding was that once you access any pension the MPAA is triggered.

In my own case, I expect to have pension income from three sources: my state pension when I am 67, a final salary pension from age 60, and my Sipp. I don’t plan to take anything out of my Sipp but would like to continue investing in it.

My question is: if I am claiming my state pension and getting my final salary pension by the time I’m 65, will I have triggered the MPAA?

From
FC/Surbiton

A

Sometimes it’s possible to keep paying into your pension even after you take money out of a pot – but you may have to pay tax on contributions of over £4,000 a year.

That’s because your annual allowance drops to £4,000 in the first full tax year after you take money from your pension pot for all defined contribution schemes you’re in. This only relates to payment into defined contribution schemes. 

This lower allowance is called the money purchase annual allowance (MPAA). Your annual allowance drops when you take any of the following from a defined contribution scheme:

  • Cash or a short-term annuity from a flexi-access drawdown fund.
  • Cash from a pension pot (‘uncrystallised funds pension lump sums’).
  • More than the limit from a capped drawdown fund.

The limit also drops to £4,000 in some other situations. Your pension provider sends you a ‘flexible access statement’ to tell you when this happens. The receipt of a pension from the state or from a defined benefit scheme will not impact on this reduced allowance.

Please note this rule is not to be confused with the annual allowance and the lifetime allowance, which set different rules on the contributions into your pension pot depending on different circumstances.