The Money Purchase Annual Allowance (MPAA) is a reduced limit on the annual allowance you can contribute to your SIPP. This can occur once you start accessing your SIPP funds, but you want to keep contributing money into your SIPP account to receive the tax relief. The standard annual allowance for the SIPP contributions is £60,000, but under specific circumstances, it can drop to £10,000.
To avoid triggering the Money Purchase Annual Allowance (MPAA) and keep your annual pension contribution at £60,000, you should not do the following:
Do Not Take Taxable Income from a Flexi-Access Drawdown: If you access your pension through a flexi-access drawdown and take any taxable income (beyond the 25% tax-free lump sum), the MPAA will be triggered. You can still withdraw up to 25% of your pension pot as a tax-free lump sum without triggering the MPAA.
Do Not Take an Uncrystallised Funds Pension Lump Sum (UFPLS): Avoid taking a UFPLS, where 25% of the withdrawal is tax-free, and the remaining 75% is taxable. This action triggers the MPAA.
Do Not Purchase a Flexible Annuity: If you buy an annuity with flexible income options. Opt for a lifetime annuity that provides a fixed income and has no flexibility features.
To maintain the standard £60,000 annual allowance for pension contributions, avoid withdrawing taxable income from your pension. Stick to options like taking only the tax-free lump sum or using arrangements (like capped drawdown) that don’t involve flexibility in accessing taxable income.
Please note that if you contribute more than the MPAA, you’ll face a tax charge on the excess, effectively clawing back the tax relief you received on the overpayment. Furthermore, you cannot use the carry forward rule to use unused allowances from previous tax years once the MPAA is triggered.