Inadvertently triggered MPAA

Helenadviceplease

I am 56 and currently paying £9,000 pa into my workplace pension including 10% matched contributions from my employer. 

Last year I got Pensionwise advice and used my 3 small pots to start an SIPP with a big name American company’s trading platform, through a local IFA. 

Both advised me about the MPAA but I assumed that that was for that financial year as I took my maximum 25% tax free allowance. 

This August, when my daughter got into uni, I thought it would be sensible to withdraw most of the SIPP as I had limited savings and I needed to pay towards her accommodation and living expenses as my ex-husband refused to contribute and her award did not even cover her accommodation cost.

I knew there would be a small tax charge as the amount would take me over the £50,000 tax threshold but I was willing to pay this given my circumstances. 

I emailed the IFA to request the fund and he emailed back to ask if I was aware of the tax implications to which I replied yes. 

When I received the MPAA letter from the American company a week later I was horrified. 

I emailed the IFA but when he didn’t call back the next working day, I called him at 4pm. He said he was about to call. He said that he thought I had stopped working a year earlier when I first set up my account with him. 

In reality, I had gone down to a 4 day working week instead of 5 for two months but then reverted to a full working week. 

When I said this he sounded nervous and worried and said he’d find out what the financial implications would be to me but needless to say I have not heard back from him. 

Firstly, I am horrified. I have worked every day of my life except 2 maternity periods,  have paid taxes and already paid all my NI contributions to receive a full pension. 

This was an innocent mistake and feel I am being unfairly penalised by the government. 

Secondly, I was (still am) paying the IFA yet he did not give me good advice. 

I understand I cannot pay the funds back (I would have got a loan) but can I seek recompense from the Financial Ombudsman for the missed pension as I am now having to reduce my pension savings to less than £4,000 pa. 

I know this may sound very stupid but I had no idea. Please can someone suggest any help. 

jamesd

It's not possible to undo the MPAA being applied to you. It's there to prevent people from withdrawing money and using it for new contributions and while that's not what you intended, you're still caught by it.

You can make a formal complaint to the IFA seeking redress for your losses. The IFA appears to have failed to have done a correct fact find about your circumstances and hence held that wrong belief that you had stopped working. They may seek to rely on your assertion that you understood the tax consequences a covering that as well, but it doesn't and the key warning they should have given you as a person continuing to work and make contributions was about the MPAA.

It was probably not essential for you to suffer the MPAA to get the money. The small pot rule allows withdrawing of a whole pot worth up to 10k without triggering the MPAA. Pots can be combined or split to facilitate this and each person can do it up to three times in their life. If the combined and crystallised pot was worth more than this in theory it could be split but in practice that is not available. Instead this option could have been preserved by keeping your crystallised pots well below 10k. For people who are still working that's highly useful because it allows withdrawing without triggering the MPAA. Combining therefore may also have harmed your interests by blocking this readily available alternative.

You can consider whether VCT investing is suitable for you, while still taking all the employer money you can up to the combined 4k limit for personal and employer pension contributions. VCTs invest in small businesses and HMRC pays 30% of your purchase price as tax relief, claimed back by you. They are exempt from dividends and capital gains tax. The 30% has to be repaid if you sell within five years, after that you're free to do it. investments are normally in multiples of a thousand Pounds.

Marcon

Helenadviceplease said:

I am 56 and currently paying £9,000 pa into my workplace pension including 10% matched contributions from my employer. 

Last year I got Pensionwise advice and used my 3 small pots to start an SIPP with a big name American company’s trading platform, through a local IFA. 

Both advised me about the MPAA but I assumed that that was for that financial year as I took my maximum 25% tax free allowance. 

 

I think it's going to be hard to claim you are an entirely innocent party if 'both advised you about the MPAA' but you 'assumed' that was for the financial year. The fact you later confirmed you understood the tax implications isn't going to help your case, I'm afraid. 

Helenadviceplease said:

I knew there would be a small tax charge as the amount would take me over the £50,000 tax threshold but I was willing to pay this given my circumstances. 

 

Not sure why you thought it would only trigger a 'small' tax charge. If you'd already taken the 25% tax free lump sum from your SIPP (which I think is what you've said), the whole withdrawal would be taxed at whatever rate applies when added to the rest of your income for the current tax year (i.e. it could all be taxed at higher rate).

Helenadviceplease said:

I emailed the IFA but when he didn’t call back the next working day, I called him at 4pm. He said he was about to call. He said that he thought I had stopped working a year earlier when I first set up my account with him. 

In reality, I had gone down to a 4 day working week instead of 5 for two months but then reverted to a full working week. 

What did you tell the IFA about your employment? Why did he think you'd stopped working?

Helenadviceplease said:

This was an innocent mistake and feel I am being unfairly penalised by the government. 

Secondly, I was (still am) paying the IFA yet he did not give me good advice. 

I understand I cannot pay the funds back (I would have got a loan) but can I seek recompense from the Financial Ombudsman for the missed pension as I am now having to reduce my pension savings to less than £4,000 pa. 

 

But the IFA twice warned you - first about the MPAA and then by checking if you understood the tax implications of your proposed course of action. FOS doesn't award recompense unless there has been poor advice/wrongdoing by the adviser, and from what you've said, that doesn't seem to be the case. An adviser isn't responsible for the  failure on the part of the client to read the paperwork (and I'd be astonished if there hadn't been warnings about the MPAA on the SIPP paperwork, the SIPP website if there is one, and on any withdrawal papers you signed), especially where - as here - you confirm the MPAA issue was highlighted by both IFA and provider.

Helenadviceplease said:

I know this may sound very stupid but I had no idea. Please can someone suggest any help. 

This is a very long shot, but I'd try it anyway: appeal to HMRC on the basis you made an innocent mistake based on misunderstanding the rules, and asking if you can pay back the cash you withdrew in error last month. Given the very short timeframe, they just might... 

JoeCrystal

If you think IFA is at fault for not offering you advice, then complain to the IFA. Ultimately, you are responsible for understanding your tax implications. You should never assume anything regarding the pension rules. The fact remains that you were told about MPAA, indeed, was asked if you were made aware of the tax implications, and you still went ahead with it. Sorry to be blunt about this.

So I am afraid you will have to live with the consequences. Besides, £4,000 per year can add up and still mean you can add a lot more until 75 anyway. So you are not that bad off, to be fair. It is still much higher than average pension savings after all, so you still got the opportunity at least.

cfw1994

Unfortunately for you, Marcon has nailed it with their comments.  You had things explained (twice).
As they put it, you can try to beg HMRC, but then you are into getting a loan to repay back (in the unlikely event they agree to it).

Consider how you can invest those excess pension payments elsewhere.  Even “just” S&S ISA would give you funds you can extract at zero tax in future.

Malthusian

I agree with jamesd. Bearing in mind that you only met the IFA a year ago it seems a major clanger for him to get the idea that you weren't working when you were.

If he knew you were still working, his warning about the MPAA would have been much more strongly worded. Instead of "Are you aware that your future tax-relieved contributions will be limited to £4,000pa" it would be "Your future pension contributions will be subject to an additional tax charge". It is conceivable that he would have advised against taking taxable income at all as not in your interests.

The ability to cash in up to £30,000 gross (including taxable income) under the "small pots rule" without triggering the MPAA is moderately obscure (but any decent IFA should be aware of it). The ability to use the small pots rule on pots that aren't small by splitting them up is even more obscure and "outside the box". But the IFA should still have been aware of both because that's what they pay you the moderately-sized bucks for.

There is a strong possibility that the FOS will view not advising you to use the small pots rule as failing to exercise due care and skill.

(I am assuming that the amount of money you wanted to cash in was lower than £30,000 before tax.)

It may be worthwhile to continue paying contributions and swallow the tax charge rather than forfeit the matched contributions by reducing your pension saving.

You are paying £4,500 into the pension and the employer pays £4,500. So £5,000 over the MPAA. Looking at those excess contributions only, assuming you are a basic rate taxpayer (notwithstanding the pension withdrawal taking you into higher rate tax), you will pay an annual allowance charge of £5,000 * 20% = £1,000.

If you don't pay into the pension, you will forfeit the employer contributions and get £2,500, minus 20% tax which is £2,000.

So even for the contributions over the MPAA, you are getting £5,000 in your pension fund at a total cost of £3,000: £1,000 annual allowance charge and £2,000 reduced net income.

That is the equivalent of higher rate tax relief for someone who doesn't benefit from matching contributions.

If you were not getting matching employer contributions it would likely not make sense to pay in contributions over the MPAA, because you would effectively get no tax relief on the way in and pay tax again on the way out. But you are, so you are turning down free money. Less free money than someone who hadn't triggered the MPAA but free money nonetheless.

*edit* I have assumed the employer matching is 1:1 but this hasn't been explicitly stated by the OP. (For context, the auto-enrolment minimum uses a 5:3 ratio, but the 10% total figure says it isn't auto-enrolment.) If it's a different ratio I will adjust my figures. I have also assumed it isn't salary sacrifice so there is no NI relief.

dunstonh

When I received the MPAA letter from the American company a week later I was horrified. 

Did you draw the pension lump sum on an advised basis or non-advised basis?   

This was an innocent mistake and feel I am being unfairly penalised by the government. 

You are not being penalised.   The Government gives tax relief for the primary purpose of encouraging people to put money aside to use for income provision in retirement.     When people draw their pension, they are either taking money away from their retirement or they have retired.   In both cases, the Government believes that those people shouldn't be getting future taxpayer funded help beyond a low level.  

Secondly, I was (still am) paying the IFA yet he did not give me good advice. Did he actually give advice?   
Normally, if you were given advice you would have been told the consequences and a report issued in advance for you to read making you aware of the consequences.    On a non-advised basis, the provider would normally issue a form with the warnings on it that you agree to before it proceeds.  It would also outline tax issues etc

Plus, you confirm the adviser made you aware of the MPPA.

<span><br></span><span>I understand I cannot pay the funds back (I would have got a loan) but can I seek recompense from the Financial Ombudsman for the missed pension as I am now having to reduce my pension savings to less than £4,000 pa.&nbsp;</span>

You cannot go to the FOS unless you have completed the complaints process with the firm you are complaining about.  Have you complained to the firm yet?


There are certainly potential issues here but we are only getting one side of the story.  I recall a case where someone was given a pre-issue report, confirmed they read it and then 3 months later phoned up irritated about something only for me to remind them of both the conversations we had and that it was in the report that they verified they read.    It was only then that they replied "oh yes, you did tell me that".      After repeating what was recommended and why, ( and in this case they realised it was the right thing and nothing to be irritated about) they apologised and we carried on.     They could easily have come to a forum to blame the adviser and make it sound like the adviser was wrong when it wasn't.   

Bits of concern is why your adviser thought you were retired when you are not.  Did you give that impression and change your mind?  It seems a strange one to get mixed up.  Especially when giving advice on retirement income options.   Assuming advice was actually given.

You say pensionwise gave advice but they do not. It's also possible your IFA didn't give advice (such as you going direct to the provider to facilitate the transaction or filling in the provider form and posting it off).   A couple of words on the phone checking something is not advice.

So, I am sitting on the fence at the moment with this one as we need more info.  

Marcon

Malthusian said:

 

The ability to cash in up to £30,000 gross (including taxable income) under the "small pots rule" without triggering the MPAA is moderately obscure (but any decent IFA should be aware of it). The ability to use the small pots rule on pots that aren't small by splitting them up is even more obscure and "outside the box". But the IFA should still have been aware of both because that's what they pay you the moderately-sized bucks for.

There is a strong possibility that the FOS will view not advising you to use the small pots rule as failing to exercise due care and skill.

lief.

You're assuming that OP has used the term 'small pots' in the technical sense of the word, rather than a simple 'common sense' statement. If she hasn't grasped the complexities of the MPAA, it is quite possible that the even more technical definition of small pots has eluded her.

OP, what was the value of each of these 3 small pensions at the time you transferred them to your SIPP?

xylophone

already paid all my NI contributions to receive a full pension. 

What exactly does your state pension forecast say?

https://www.gov.uk/check-state-pension

Last year I got Pensionwise advice and used my 3 small pots to start an SIPP with a big name American company’s trading platform, through a local IFA. 

Pensionwise offers guidance/  information about the options available to you rather than personalised advice on which options would suit you best. 

You went on to consult a Financial Adviser for personalised advice.

Both advised me about the MPAA but I assumed that that was for that financial year as I took my maximum 25% tax free allowance. 

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-whole-pension-in-one-go

Continuing to pay in

If you take your pension pot in one go and you do not do this under the small pot lump sum rules (see below for more information) then this might affect how much you can continue to save for retirement.

The Money Purchase Annual Allowance for 2021/22 is £4,000.

Find out more about in our Money Purchase Annual Allowance guide

If you want to carry on building up your pension pot, taking a lump sum might not be suitable.

See below for how this is different if the value of your pension pot is less than £10,000. 

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

The specific "small pot" rule was explained to you?

If so, the effect of taking  anything  more than the 25% PCLS from anything other than a "small pot" was also covered.

You didn't actually use the small pot rule - you combined three pensions into one SIPP and then took a PCLS - therefore taking the remaining cash had both tax and MPAA implications.

..... I was (still am) paying the IFA yet he did not give me good advice. 

It would seem to be the case that it was your misunderstanding (MPAA relating to one tax year only) of what you had been  informed (by PW)/advised (by your FA)  that has caused your problem?

And in fact, if you  were in the situation that you had no relevant earnings, your ability to make tax relieved contributions to a pension would have been limited to a gross £3,600.

Do you have any communication in writing from your FA concerning his understanding of your position regarding current/future employment?

Malthusian

Marcon said:

You're assuming that OP has used the term 'small pots' in the technical sense of the word, rather than a simple 'common sense' statement. If she hasn't grasped the complexities of the MPAA, it is quite possible that the even more technical definition of small pots has eluded her.

No, the only thing I'm assuming (and I flagged the assumption so the OP can confirm if it's wrong) is that the total sum the OP wanted to withdraw was less than £30,000 before tax. Given the purpose of the withdrawal was to top up a child's university expenses, it seems reasonable.

The size of her original three pots is irrelevant as they could have been combined and split up into £10k chunks as needed.

xylophone

The size of her original three pots is irrelevant as they could have been combined and split up into £10k chunks as needed.

If they were £10,000 each (or under), she could have taken a PCLS from each and withdrawn the balance without triggering the MPAA.

She could have transferred all three to the SIPP, split into three small pots within the SIPP and proceeded to take PCLS/income from each without triggering MPAA.

However, as far as I can make out, she transferred in all three pots to make one lump sum and then withdrew the combined PCLS (I think in the tax year 20/21).

It is not clear that she had any particular purpose in view for the SIPP at that point.

It seems that her daughter's acceptance and take up of a university place (last month) triggered the decision to take the remaining cash in the SIPP in order to finance the daughter's maintenance (as father had refused to assist).