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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Annual allowance: money purchase annual allowance: hybrid arrangements: any hybrid arrangements

Section 227B(5) Finance Act 2004

If the money purchase annual allowance rules apply for a tax year and a pension input amount for a hybrid arrangement has to be taken into account, there are special rules for the hybrid arrangement if the following applies in respect of the hybrid arrangement:

  • there is a pension input amount for a possible defined benefits provision and other money purchase provision and both pension input amounts are the same in amount, or
  • there is a pension input amount for a possible defined benefits provision and cash balance provision and both pension input amounts are the same in amount, or
  • there is a pension input amount for a possible defined benefits provision, other money purchase provision and cash balance provision and the pension input amount for the defined benefits provision is the same in amount of whichever is the greater of the pension input amounts for the other money purchase and cash balance provision.

Where there are such pension input amounts for the hybrid arrangement, the pension input amount for the possible other money purchase or cash balance provision is used as part of the money purchase annual allowance test instead of the pension input amount for the possible defined benefits provision.

Example

Pavel is subject to the money purchase annual allowance for the current tax year due to flexibly accessing a money purchase arrangement in the previous tax year.  The money purchase annual allowance for the current tax year is £10,000.

For the current tax year, Pavel has one arrangement to take into account for the annual allowance which is a hybrid arrangement. The pension input period ending in the tax year for the arrangement had started after Pavel flexibly accessed the money purchase arrangement.

The hybrid arrangement may provide either defined benefits or other money purchase benefits when he retires.

Pavel must calculate the pension input amount as if the arrangement had been a defined benefits as well as an other money purchase arrangement. Ordinarily, whichever is the greater of those amounts is the pension input amount for the arrangement for the tax year concerned. For the current tax year, he determines his defined benefits pension input amount for the arrangement is £15,000 and his other money purchase pension input amount is also £15,000.

As Pavel is subject to the money purchase annual allowance and the pension input amount for his hybrid arrangement happens to be the same whether based on the defined benefits provision or the other money purchase provision, the pension input amount that applies for the money purchase annual allowance test is that for the other money purchase provision.

For the money purchase annual allowance test, this means the full other money purchase pension input amount (£15,000) is tested against the £10,000 money purchase annual allowance and that there are no other pension input amounts to test against the alternative annual allowance.

This means Pavel’s alternative chargeable amount for the tax year is £5,000 (£15,000 less £10,000).

Pavel must also calculate his default chargeable amount for the tax year by comparing his total pension input amount for the tax year against the annual allowance for the tax year. The annual allowance for the tax year is £40,000.

In this case, it does not matter whether Pavel uses his defined benefits pension input amount or his other money purchase pension input amount for the purpose of his total pension input amount as the same amount (£15,000) is tested against the annual allowance.

Pavel does not have a default chargeable amount for the tax year as £15,000 less £40,000 = nil.

For the tax year, Pavel’s alternative chargeable amount applies as that amount (£5,000) is greater than his default chargeable amount for the tax year (nil).

Pavel is liable to an annual allowance charge on £5,000 for the tax year.