Question:

A client made a lump sum contribution of £40,000 (gross) to their money purchase pension in December 2023. Their employer also pays £1,000 per month into the pension. The client withdrew £10,000 via UFPLS on 1 February 2024. As the UFPLS payment has triggered the Money Purchase Annual Allowance (MPAA), will they be subject to an annual allowance tax charge for the 2023/24 tax year?

Paul’s answer:

At face value, the immediate answer is it does not appear they have exceeded the MPAA and should not suffer a tax charge, provided they have a full annual allowance available (i.e., no tapering applies).

UFPLS is indeed one of the MPAA trigger events (PTM056520). However, it is only pension input amounts for money purchase arrangements that occur following the date of the trigger event that are measured against the MPAA test.

As your client first triggered the MPAA on 1 February 2024, it will be the contributions that were received between that date and the end of the tax year (5 April 2024) that will be tested for MPAA purposes. As the lump sum contribution was paid before this period, only the monthly employer contributions of £1,000 will be measured against the test. These totalled less than £10,000 for the period concerned.

The total value of contributions for the tax year (£52,000) will also need to be tested against the full annual allowance (for the 2023/24 tax year) of £60,000. However, as neither limit has been breached, there should be no annual allowance tax charge due for 2023/24 tax year.

For the 2024/25 tax year, your client will still have a full annual allowance (£60,000) plus any carry forward from previous years (assuming no tapering applies). However, only £10,000 can be paid to money purchase schemes before a tax charge will apply. As this test is on all contributions received, whether made by the client or their employer, it would seem sensible to check whether the employer contributions are continuing at £1,000 per month as a tax charge will apply if total contributions exceed £10,000 for the tax year. If your client does exceed the MPAA in any tax year, they will have a reduced annual allowance (known as the “alternative annual allowance”) of £50,000 (less if tapering applies), plus any available carry forward, for the remainder of their pension savings. This would effectively be any defined benefit savings.

It should also be remembered that any unused MPAA cannot be carried forward to subsequent tax years.

Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

UKM0424/386530/SSO/0325