Money Purchase Annual Allowance: what you need to know about the tax-free savings limit for 2017/18

The Money Purchase Annual Allowance (MPAA) is a tax-free savings limit that applies to people who have begun drawing money from their pension but still want to contribute money into a defined benefit pension.

Thanks to the new pension freedoms introduced in April 2015 you can access your pension fund from 55 and take a 25% lump sum tax-free.

But once you have accessed your pension money, the amount you can put back in is vastly reduced under the new MPAA rules.

The MPAA limit had been set at £10,000 but Chancellor Philip Hammond wanted to cut the annual tax-free pension savings limit to £4,000 a year.

The change was meant to stop people unfairly benefiting from ‘recycling’ their pension savings – withdrawing cash from their pots and then claiming tax relief on new contributions.

The new £4,000 MPAA limit was due to come into force on 6 April earlier this year, but the move was put on hold as the Government rushed to pass the Finance Bill ahead of the snap General Election.

Now everything has calmed down the Government has confirmed the £4,000 MPAA will be reinstated and will apply retrospectively for 2017/18.

Mel Stride, the financial secretary to the Treasury, confirmed everything left out of the Finance Bill would be applied from April 2017.

He said: “The Government…expects to introduce a Finance Bill as soon as possible after the summer recess containing the withdrawn provisions. 

“Where policies have been announced as applying from the start of the 2017-18 tax year or other point before the introduction of the forthcoming Finance Bill, there is no change of policy and these dates of application will be retained. 

“Those affected by the provisions should continue to assume that they will apply as originally announced.”

MPAA is set at £4,000 a year and you are not allowed to carry forward any unused allowances from previous years.

The MPAA includes both your own contributions and any other contribution made on your behalf from your employer into a defined benefit pension.

The limit is per person rather than per scheme. So, it applies across all contributions made in a year.

If you pay too much into your pension in a tax year, and end up going over the annual allowance you will be hit with a tax charge on the excess amount.

The amount you’ve gone over by will be added to your income for that year and you’ll be charged Income Tax accordingly.

The excess could push you into a higher Income Tax bracket.

Before making a big pension contribution it could be worthwhile seeking expert advice to make sure you don’t end up with a hefty tax bill.

The MPAA is only triggered if you access your pension.

If you haven't done this you can save £40,000 a year into a pension or up to 100% of your annual earnings.

However, high earners, those with income over £150,000, will see their allowance taper down to £10,000 a year.