'Alternative annual allowance' for DB members
As the name suggests, the MPAA does not apply to defined benefit pension schemes, as they do not offer flexible access to pension savings.
However, many DB members also have a DC pot. And if that is the case the lesser known ‘alternative annual allowance’ may come into play to measure the increase in the DB benefits where the MPAA has been exceeded.
The AAA was previously £36,000 but that rises to £50,000 from April 6 2023, and carryforward is also available for the DB scheme if needed.
Other complexities arise when an individual is subject to both the tapered annual allowance and the MPAA.
In this situation the TAA will be the overall annual allowance, although the MPAA will still apply to the level of contributions that can be made to a DC scheme.
For example, if an individual’s TAA is £21,000, the client could pay the MPAA of £10,000 to the DC scheme, leaving £11,000 available for the DB scheme.
If someone does exceed the MPAA, the annual allowance tax charge is not a fixed rate, it effectively reclaims any tax relief given on the contributions. So, the excess is added to other taxable income and taxed appropriately.
Normally, any tax charge arising is paid by the individual via a self-assessment return.
However, it is possible a scheme could agree to pay the charge and reduce the member’s benefits accordingly. It is not possible to force a scheme to pay as that is only an option where the standard annual allowance has been exceeded.
It is a positive that the MPAA was increased in the Budget, as fewer people will be affected.
But as this article illustrates, even with a higher MPAA many complexities remain, and those who are, or could be, affected will need advice to navigate the options and implications.
Despite the helpful increase, this whole area could do with simplifying.
Andrew Tully is technical director at Canada Life
