Guidance

Money purchase annual allowance: split pension input periods

Find out how the pension input amount is split when a member flexibly accesses their pension pot and triggers the lower annual allowance.

When split pension input periods occur

If a pension scheme member flexibly accesses their pension pot they will trigger the money purchase annual allowance rules. This means that they’ll have a £10,000 annual allowance (money purchase annual allowance) for money purchase pension savings for that tax year. This does not apply to any money purchase savings made before they flexibly accessed their pension pot. They’ll also have a reduced £30,000 annual allowance (plus any carry forward from the previous 3 tax years) for their defined benefit pension savings.

There are a number of possible situations for pension input periods that may be affected. There may be a pension input period that:

  1. has already ended in the tax year - for example, the pension input period runs from 1 October 2015 to 30 September 2016 and the trigger event occurs on 1 November 2016
  2. will end in the tax year but hasn’t ended when the trigger event occurs - for example, the pension input period runs from 1 January 2015 to 31 December 2015 and the trigger event occurs on 1 December 2015
  3. ends in the next tax year - for example, the pension input period runs from 1 January to 31 December 2016 and the trigger event occurs on 1 March 2016

In situation 1, for the purposes of the £10,000 money purchase annual allowance the pension input amount is treated as nil.

In situations 2 and 3 the pension input amount must be split and the amounts apportioned. You’ll need to calculate the amount up to and including the date of the trigger event, and the amount after the trigger event. Only the amount after the trigger date is tested against the £10,000 money purchase annual allowance.

You can find detailed guidance on the money purchase annual allowance in the Pensions Tax Manual.

How the pension input amount is split

The way the pension input amount is split also depends on the type of money purchase pension arrangement.

If it is not a cash balance arrangement (a defined contribution arrangement), the split is based on the contributions for each period.

If it is a cash balance arrangement, then the pension input amount for the arrangement is split proportionally. Therefore, if the pension input period is 365 days and the trigger event occurred 100 days before the last day of the pension input period, then the pension input amount that is tested against the money purchase annual allowance is 100/365 times the pension input amount.

Examples

Example A

On 1 November 2015, Bruce took a payment from his flexi-access drawdown fund. This triggers the money purchase annual allowance rules.

Bruce has 2 defined contribution money purchase arrangements. The pension input period for the:

  • first is 1 October to 30 September
  • second is 1 January to 31 December

On the 15th of each month he contributes:

  • £400 per month to the first arrangement
  • £600 per month to the second arrangement

As the pension input period for the:

  • first arrangement ends before Bruce took the payment, the 12 contributions of £400 that are tested against the 2015 to 2016 annual allowance are not tested against the money purchase annual allowance
  • second arrangement ends after Bruce took the payment, the 2 contributions of £600 paid in November and December are tested against the money purchase annual allowance

If Bruce has no other savings, his money purchase input amount that is tested against the £10,000 money purchase annual allowance is £1,200. As this is less than £10,000, all his savings are tested against the £40,000 annual allowance for 2015 to 2016. As these savings total £12,000 they are less than £40,000 and Bruce does not have to pay any annual allowance.

Example B

Wayne triggers the money purchase annual allowance rules on 15 September 2015. He has 2 arrangements, a cash balance arrangement and a defined contribution money purchase arrangement.

The pension input periods for the arrangements are for 12 months and end on:

  • 31 March 2016 for the cash balance arrangement
  • 15 February 2016 for the defined contribution money purchase arrangement

Wayne’s pension input amount for his cash balance arrangement is £12,000. He also makes 2 payments to his other money purchase arrangement of £15,000 on 1 July 2015 and £8,000 on 1 February 2016.

For the purposes of his 2015 to 2016 money purchase annual allowance, his pension input amount for the cash balance arrangement is £12,000 x 153 (the number of days from 16 September 2015 - the day after flexible access - to 15 February 2016) divided by 365 days (days in the pension input period) = £5,030

For the purposes of his 2015 to 2016 money purchase annual allowance, his pension input amount for the other money purchase arrangement is the contributions paid on or after 16 September 2015, that is £8,000.

Wayne’s total money purchase input amount for 2015 to 2016 is £13,030. As this exceeds £10,000 he now has to work out what his annual allowance charge will be. To do this he needs to consider whether his alternative chargeable amount is more than his default chargeable amount.

The chargeable amount is the higher of:

  • the alternative chargeable amount which is the total of the excess of Wayne’s defined benefit pension savings over the alternative annual allowance (£30,000) plus the excess of money purchase savings over the money purchase annual allowance (£10,000)
  • the default chargeable amount which is the excess of Wayne’s defined benefits pension savings plus money purchase pension savings over the annual allowance (£40,000)

In Wayne’s case, he has no defined benefit inputs so his alternative chargeable amount is the excess money purchase input of £3,030.

The default chargeable amount is the excess of the total pension input amount calculated under the normal rules over £40,000 (the normal annual allowance for the year).

This gives a figure of £35,000 which is within the normal annual allowance of £40,000, so the default chargeable amount is nil.

In Wayne’s case his alternative chargeable amount is higher than his default chargeable amount and the annual allowance charge will be applied to his alternative chargeable amount of £3,030.

Further guidance

Find out how you pay tax if you go above the annual allowance.

You can find detailed guidance on the annual allowance in the Pensions Tax Manual.

Published 6 April 2015