18-05-2025
Money Purchase Annual Allowance: What is the MPAA and what does it mean for your pension?
If you want to dip into your pension before you've stopped saving or really retired, it's important that you are aware of the Money Purchase Annual Allowance (MPAA) and the impact it will have on your future contributions.
Here, Telegraph Money explains what the MPAA is and how it could restrict your ability to grow your pension as retirement approaches.
What is the money purchase annual allowance?
How does the money purchase annual allowance work?
What triggers the money purchase annual allowance?
Pension allowance vs MPAA
Why it's important to think about the MPAA
Managing your pension after triggering the MPAA
FAQs
What is the money purchase annual allowance?
Each year, it's possible to pay 100pc of your earnings, up to £60,000 a year, into your pension and get tax relief on your contributions.
However, once you have made a taxable withdrawal from your pension, this allowance is slashed to just £10,000 a year.
Clare Moffat, pensions and tax expert at Royal London, explains: 'Since the introduction of 'Pension Freedoms' a decade ago, pension savers have been able to take as much or as little as they want out of their pensions from age 55, instead of buying an annuity.
'To prevent people from repeatedly taking money out, benefiting from tax-free cash, and putting money back in again with the benefit of tax relief, HMRC introduced a limit on the amount people could invest back in to pensions once they had started drawing taxable cash. This is called the Money Purchase Annual Allowance (MPAA).'
How does the money purchase annual allowance work?
The MPAA limits the amount that you can pay into your pension and still get tax relief on your contributions, once you have made a taxable withdrawal from a defined contribution pension (also known as money purchase schemes).
Charlene Young, senior pensions and savings expert at AJ Bell, says: 'The MPAA is now set at £10,000 per tax year and once triggered it applies to all money paid into money purchase pensions – which include Sipps and personal pensions, but not defined benefit schemes.
'The reduced allowance covers your total pension savings in these pensions for a year – that's your personal contributions, including tax relief, plus those by your employer or anyone else.'
She adds: 'Anything above £10,000 is taxed at your marginal rate – meaning it is added to your other income for the year to work how much tax you'll pay. If you trigger the MPAA part way through a tax year, anything paid in before this date is not caught. But once triggered, you'll be unable to carry forward unused allowance from previous years to increase the £10,000 allowance for your money purchase pensions.'
Non-earners, those with incomes below the personal allowance, are limited to contributing £2,880 a year – which will be boosted to £3,600 once basic rate tax relief has been applied.
Your pension provider will tell you if you are making a withdrawal that triggers the MPAA and, if you proceed, you will get written confirmation within 31 days.
Once triggered, the MPAA is permanent – you cannot revert to the standard pension allowance in future tax years.
What triggers the money purchase annual allowance?
Andrew King, of wealth manager Evelyn Partners, says the MPAA will kick in when you access your pension 'flexibly'. This includes the following scenarios:
Taking an uncrystallised fund pension lump sum or a standalone lump sum (not tax-free cash)
Taking an income payment from most drawdown plans set up after April 5, 2015
Receiving an income from a flexible annuity (a fixed-term annuity that pays out for a specific period like five or 10 years)
Receiving an income payment from a small scheme pension with 12 members or fewer
Taking an income payment from a drawdown payment that was converted to flexible drawdown after April 5, 2015
Having flexible drawdown before April 6, 2015
Exceeding the income limits from a capped drawdown plan set up before April 6, 2015
What won't trigger the MPAA?
Mr King adds that the following circumstances wouldn't trigger the MPAA:
Taking income from a defined benefit or final salary pension
Taking a pension arrangement as a small lump sum due to it being worth less than £10,000
Taking income from capped drawdown set up before April 6, 2015, which remains within capped drawdown limits
Taking tax-free cash only and no income
Taking a pension as an annuity
Pension allowance vs MPAA
Pension allowance
The maximum you can pay into a pension is usually 100pc of earnings up to £60,000 a year
The pension allowance ceases to apply once a flexible withdrawal has been made
'Carry forward' rules allow you to used unused allowance from the previous three years
MPAA
The maximum you can pay into a pension is £10,000 a year
It's usually triggered once you have made a taxable withdrawal from your pension
You can no longer take advantage of carry forward rules once you have triggered the MPAA.
Why it's important to think about the MPAA
According to research from Royal London, around one-third of people between the ages of 55 and 64 have accessed their pensions flexibly and triggered the MPAA.
But Moffat warns savers to think about the impact triggering the MPAA will have on your ability to keep paying into your pension.
She says: 'The changing shape of retirement means workers are now less likely to have a hard stop to the world of work, preferring to transition gradually into retirement. This makes the MPAA an important consideration for nearly half of workers planning to gradually retire by reducing their working hours, making it likely that many will come up against the MPAA if they want to start paying more into pensions again.'
However, she says that there are ways to avoid triggering the MPAA and protect your full pension allowance.
'If you are still working but you want to go on holiday or make a bigger purchase, like a new kitchen or car, then taking a small pot which is less than £10,000 – or only taking tax free cash and moving the rest into drawdown – means that you won't trigger the MPAA.
'For many people, their 50s are the point that they are earning the most and able to pay more into pensions, so triggering the MPAA could limit pension contributions and that could mean that you might not have the retirement that you planned.'
Managing your pension after triggering the MPAA
Mr King says that once you have triggered the MPAA, you will need to take care to ensure that you do not contribute more than £10,000 a year into your pension.
'This could be problematic if you have retired early, taken your pension and then triggered the MPAA, and then you return to work in a high paying job, which comes with a salary and pension contributions which exceed £10,000 per annum. In this instance, you would have to tell your new employer to cap total contributions at £10,000 or face the tax charge.'
Your pension provider will tell you when you make a withdrawal that triggers the MPAA. However, it will be your responsibility to inform other pension providers you have pots with and any new providers.
FAQs
What happens if you exceed the MPAA?
If you exceed the MPAA you will not get the benefit of tax relief on that money – instead it would be added to your income for the year and taxed at your highest rate. You will normally need to complete a tax return to declare and pay the charge.
How do I find out if went above the MPAA?
If you aren't sure how much has been paid into your defined contribution pensions during the tax year, you can contact each of your providers. If the total – including employer contributions and tax relief – exceed the MPAA, you will need to pay a tax charge.
There is also a calculator on the government website that can help you work out if you have a tax charge.
If you are taking money out of a small pension – worth £10,000 – or less, you won't trigger the MPAA. This means that if you want to take money out of a pension, while you are still contributing, it's worth turning to any small pots you might have first.
