PTM056580 - Annual allowance: money purchase annual allowance: hybrid arrangements: relevant hybrid arrangements: example: one relevant hybrid arrangement

Section 227D Finance Act 2004

Example

Sara is subject to the money purchase annual allowance for tax year 2017-18 due to flexibly accessing a money purchase arrangement in the previous tax year. The tapered annual allowance does not apply to Sara for the tax year.

The annual allowance for the tax year is £40,000.

For the money purchase annual allowance for the tax year there is a £4,000 allowance for ‘money-purchase inputs’ and the alternative annual allowance for ‘other inputs’ is £36,000 (£40,000 less £4,000). (If the tax year had been 2016-17, respectively, the money purchase annual allowance and the alternative annual allowance would be £10,000 and £30,000.)

For the tax year, Sara has one arrangement to take into account for annual allowance purposes. The arrangement is a hybrid arrangement which was set up after 14 October 2014.

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

The pension input period ending in the tax year for the arrangement had started after Sara flexibly accessed the money purchase arrangement.

For annual allowance purposes, Sara must therefore 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 tax year, she determines her defined benefits pension input amount for the arrangement is £15,000 and her other money purchase pension input amount is £12,000.

For the purpose of the annual allowance for the tax year, Sara’s total pension input amount is £15,000 (i.e. the defined benefits pension input amount for the hybrid arrangement).

Sara’s total pension input amount (£15,000) has not exceeded the annual allowance for the tax year (£40,000). This means that the amount of Sara’s total pension input amount which would be chargeable to the annual allowance charge by reference to the annual allowance for the tax year is nil (the ‘default chargeable amount’).

However, for the hybrid arrangement, the £15,000 defined benefits pension input amount is greater than the £12,000 other money purchase pension input amount. This means that the arrangement is a relevant hybrid arrangement and that a further series of steps therefore needs to be carried out using the hybrid arrangement in different combinations.

The further set of steps are to determine if the money purchase annual allowance (£4,000 in this case) is exceeded and, if so, the greatest amount that would be chargeable to the annual allowance charge by reference to the money purchase annual allowance (the ‘alternative chargeable amount’).

Sara must then compare the alternative chargeable amount against the default chargeable amount. The alternative chargeable amount will apply for the tax year if it exceeds the default chargeable amount. Otherwise the default chargeable amount will apply.

Sara has only one relevant hybrid arrangement which means there are two possible combinations, one containing the hybrid arrangement and one which is empty.

For the combination containing the hybrid arrangement, Sara has to use the £12,000 other money purchase pension input amount instead of the £15,000 defined benefits pension input amount.

For the empty combination (i.e. not containing the hybrid arrangement), Sara has to use the £15,000 in the defined benefits pension input amount.

Of the two combinations, only the first results in a ‘money-purchase input’ and it exceeds the £4,000 money purchase annual allowance. This means the alternative chargeable amount is worked out on this basis.

The ‘money-purchase input’ for the hybrid arrangement is £12,000, giving an excess ‘money-purchase input’ of £8,000 (£12,000 less £4,000).

There are no ‘other inputs’ to be tested against the alternative annual allowance part of the money purchase annual allowance. (If there were any that meant the alternative annual allowance was exceeded, the excess would be added to the ‘money-purchase input’ excess.)

This means the greatest amount chargeable to the annual allowance charge by reference to the money purchase annual allowance is £8,000, which is Sara’s alternative chargeable amount.

Sara’s alternative chargeable amount (£8,000) exceeds her default chargeable amount (nil).

This means Sara is liable for the annual allowance charge on £8,000 for the tax year.