What Is the MPAA?
The Money Purchase Annual Allowance (MPAA) is a reduced annual allowance of £10,000 that applies to your defined contribution (money purchase) pension contributions once you have flexibly accessed your pension benefits. It was introduced alongside the pension freedoms in April 2015 to prevent people from recycling pension withdrawals back into their pension to gain additional tax relief.
Under normal circumstances, the annual allowance for pension contributions is £60,000. Once the MPAA is triggered, this drops to £10,000 for money purchase contributions – permanently.
What Triggers the MPAA?
The MPAA is triggered by specific types of pension withdrawals from defined contribution schemes. Not all pension access triggers it.
Actions that DO trigger the MPAA
- Taking income from flexi-access drawdown – once you withdraw any taxable income (beyond your tax-free cash) from a drawdown arrangement
- Taking an Uncrystallised Funds Pension Lump Sum (UFPLS) – a lump sum taken directly from an uncrystallised pension pot, where 25% is tax-free and 75% is taxable
- Receiving payments from a flexible annuity – certain types of annuity that allow the payment amount to decrease
- Taking income from a scheme pension where the scheme has fewer than 12 members – this applies to small self-administered schemes (SSAS)
Actions that do NOT trigger the MPAA
- Taking your 25% tax-free cash and moving the rest into drawdown without withdrawing income
- Buying a lifetime annuity (a conventional level or escalating annuity)
- Taking a small pot lump sum (pots worth £10,000 or less, maximum of three)
- Receiving a defined benefit (final salary) pension
- Taking a trivial commutation lump sum (total pension savings under £30,000)
- Receiving a serious ill-health lump sum
MPAA Trigger Scenarios
| Action | Triggers MPAA? | Notes |
|---|---|---|
| Take 25% tax-free cash, leave rest invested in drawdown | No | Only triggered when you withdraw taxable income |
| Take 25% tax-free cash and £500 income from drawdown | Yes | Even a small income withdrawal triggers it |
| Take UFPLS of £5,000 | Yes | 75% (£3,750) is taxable, triggering MPAA |
| Buy a level annuity | No | Standard annuity purchase is not a flexible access |
| Receive DB pension payments | No | Defined benefit pensions do not trigger MPAA |
| Take small pot lump sum (£10,000 or less) | No | Small pot commutation is exempt |
How the MPAA Affects Your Contributions
Once the MPAA is triggered, your pension landscape changes significantly:
- Your annual allowance for money purchase (DC) contributions drops from £60,000 to £10,000
- You cannot carry forward unused MPAA from previous years
- Employer contributions count towards the £10,000 limit
- If you exceed the MPAA, you face an annual allowance charge on the excess
If you are still working and your employer contributes to a defined contribution pension, you need to ensure total contributions (yours plus your employer's) stay within £10,000. For many workers in auto-enrolment schemes with employer matching, this limit is easily reached.
The Alternative Annual Allowance
If you have both defined contribution and defined benefit pension accrual, triggering the MPAA does not necessarily limit you to £10,000 in total. Instead, a more complex calculation applies:
- Your money purchase contributions are limited to £10,000 (the MPAA)
- Your defined benefit accrual is tested against the alternative annual allowance, which is the standard annual allowance (£60,000) minus the MPAA (£10,000) = £50,000
- Your combined pension inputs cannot exceed £60,000 in total
This means if you have a DB pension alongside your DC pension, you can still benefit from significant pension accrual even after triggering the MPAA.
Strategies to Avoid Triggering the MPAA
1. Take tax-free cash only
You can take your 25% tax-free cash and designate the remaining 75% to drawdown without triggering the MPAA – as long as you do not withdraw any taxable income from the drawdown pot.
2. Use a lifetime annuity
Purchasing a standard lifetime annuity does not trigger the MPAA. If you need regular guaranteed income, this can be a way to access pension benefits while preserving your full annual allowance.
3. Use small pot commutation
If you have pension pots worth £10,000 or less, you can take up to three small pot lump sums without triggering the MPAA. This can be a useful way to access smaller pots while keeping your main pension intact.
4. Maximise contributions first
If you plan to access your pension flexibly, consider making maximum pension contributions before triggering the MPAA. Use carry forward to make a large contribution, then access your pension afterwards.
MPAA and Pension Recycling
The MPAA exists partly to prevent pension recycling – the practice of withdrawing pension money tax-free and contributing it back to gain additional tax relief. Even with the MPAA in place, HMRC has specific anti-recycling rules. If HMRC believes you have deliberately recycled pension withdrawals, they can apply tax charges and penalties.
Notification Requirements
When you trigger the MPAA, your pension provider must notify you within 31 days. You must then inform any other pension schemes you contribute to within 91 days. This ensures all your pension providers know to apply the £10,000 limit. Failure to notify can result in incorrect tax relief being claimed, leading to additional charges later.
Planning Before You Access Your Pension
Before making any flexible withdrawal from your defined contribution pension, consider:
- Do you still plan to make pension contributions (or does your employer contribute on your behalf)?
- Will the £10,000 MPAA limit be sufficient for your ongoing pension saving needs?
- Can you meet your cash needs from other sources (ISAs, savings, other investments) to avoid triggering the MPAA?
- Would taking your tax-free cash only (without income withdrawal) be enough for now?
- Have you maximised contributions using carry forward before accessing benefits?