The Annual Allowance (AA) is set each year. It aims to limit the amount you can save into a pension while still receiving income tax relief. There are now 3 types of Annual Allowance: the Annual Allowance, the Money Purchase Annual Allowance and the Tapered Annual Allowance.
Tapered Annual Allowance
The Tapered Annual Allowance was introduced on 06/04/2016. It reduces the standard Annual Allowance for higher earners. Anyone earning less than £110,000 in the 2019-20 tax year should not be affected by this change. You can read more about this here: Tapered Annual Allowance
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) was introduced on 06/04/2015. If someone goes through a “trigger event” they will be subject to the Money Purchase Annual Allowance instead of the normal Annual Allowance. The Money Purchase Annual Allowance is set at just £4,000 – significantly lower than the full Annual Allowance. In addition anyone who is subject to the Money Purchase Annual Allowance will no longer be able to make use of Carry Forward relief on their money purchase pension contributions (Carry Forward relief is explained further down this page). Going through a “trigger event” is irrevocable, so it is vital to examine whether or not you would be affected.
Essentially if you go through a “trigger event” and then decide to invest £5,000 (after tax relief) into a pension you would only get income tax relief on the first £4,000.
Importantly these changes do not directly affect defined benefits schemes (such as final salary schemes). Therefore these types of pension will be largely unaffected by the Money Purchase Annual Allowance.
Money Purchase Annual Allowance Trigger events
Of course you might wonder what a “trigger event” is. The list of trigger events includes (but is not limited to) the following:
- Taking an Uncrystallised Fund Pension Lump Sum (UFPLS)
- Taking an income withdrawal under Flexi-Access Drawdown
- Moving from Flexible Drawdown into Flexi-Access Drawdown
If the value of the contributions you pay into your pension exceeds the AA in the tax year you make the contribution you may be subject to an AA charge (please see the Carry forward relief section). The aim of the AA charge is to remove the tax relief you received on the pension contribution. The tax charges are 45%, 40% or 20%. Please note this includes all pension contributions such as your own personal contributions and any employer contributions.
Carry forward relief
If you do not use your full AA each year (but you have been a member of a pension scheme) you may be able to carry the unused AA forward to the next tax year. You can do this for 3 tax years. For example if you have not made any pension contributions in the last 3 years but you have been a member of a pension scheme, your carry forward relief will be a total of £120,000 which is made up of £40,000 (2015-16), £40,000 (2016-17) and £40,000 (2017-18). You could then pay a maximum of £160,000 into a pension scheme which is made up of £40,000 annual allowance for 2018-19 plus £120,000 total carry forward relief for the last 3 tax years.
The “standard” Annual Allowance amount has changed a number of times since April 2006 as shown in the table below: