Pensions offer valuable tax relief and help many people save for retirement. However, once you start taking taxable income from a pension, the rules can change. The Money Purchase Annual Allowance (MPAA) can significantly reduce how much you can continue saving into your pension.
As a result, it often catches people out. Many only become aware of it after taking money from their pension.
The Money Purchase Annual Allowance Explained
The Money Purchase Annual Allowance sets a lower limit on how much you can pay into a defined contribution pension, while still receiving tax relief. For most people, the standard Annual Allowance allows pension contributions of up to £60,000 per tax year. This figure includes personal and employer contributions, as well as tax relief.
However, once you trigger the MPAA, this allowance reduces sharply. The maximum you can then contribute falls to £10,000 per year. This figure still includes personal and employer contributions, as well as tax relief.
Tax relief usually only applies up to 100% of your earnings, if you earn less than £10,000. If you have no earnings at all, you can normally still receive tax relief on up to £3,600.
When Does the MPAA Apply?
The Money Purchase Annual Allowance does not apply automatically when you reach retirement age. Instead, it only applies after you flexibly access a defined contribution pension.
You will normally trigger the MPAA when you:
- Take a taxable lump sum (known as an Uncrystallised Funds Pension Lump Sum)
- Move into flexi-access drawdown and begin taking income
- Withdraw your entire pension pot as taxable cash
- Exceed the income limits on an older capped drawdown plan
Once triggered, the MPAA applies to all future contributions into defined contribution pensions.
What Does Not Trigger the MPAA?
Not all pension withdrawals activate the Money Purchase Annual Allowance. This often surprises people and can influence how and when they access their pension.
You usually avoid triggering the MPAA if you:
- Take up to 25% of your pension as tax-free cash only
- Use your pension to buy a guaranteed lifetime annuity
- Cash in a small pension pot worth less than £10,000
- Receive income from a defined benefit pension scheme
How the Money Purchase Annual Allowance Works
The timing of your first taxable pension withdrawal matters most.
If you trigger the Money Purchase Annual Allowance part way through a tax year:
- Contributions before the trigger date count towards the £60,000 Annual Allowance
- Contributions after the trigger date count towards the £10,000 MPAA
From the start of the next tax year, the £10,000 limit applies for the entire year. Once the MPAA applies, you cannot use unused allowances from previous tax years. Pension Carry Forward no longer applies to defined contribution pensions.
Exceeding the MPAA
If total contributions exceed £10,000 in a tax year, tax relief no longer applies to the excess amount.
HMRC charges Income Tax on the excess at your Marginal Rate. This is the Annual Allowance Tax Charge. You must declare this charge through a Self Assessment tax return. In some cases, your pension provider may pay the tax directly from your pension benefits.
Having a Defined Benefit Pension
The Money Purchase Annual Allowance only affects defined contribution pensions.
If you also belong to a defined benefit scheme, different rules apply. In many cases, you can still benefit from the Alternative Annual Allowance. This often allows up to £50,000 of growth within the defined benefit pension. However, this depends on your income and overall pension position.
Higher earners may face lower limits due to Tapered Annual Allowance rules. These rules can further restrict pension saving.
What To Do After Triggering the MPAA
After you trigger the Money Purchase Annual Allowance, your pension provider must send you a flexible access statement. After receiving this statement, you must inform all other active defined contribution pension schemes. Do this within 91 days of receiving the statement or joining a new scheme.
Failure to notify other schemes can result in penalties. These penalties can increase over time if the issue remains unresolved.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.