What is the MPAA and how does taking money from my pension reduce my allowance?

Full answer

The MPAA is triggered when you start flexibly accessing a defined contribution pension, such as taking taxable income from flexi-access drawdown or an uncrystallised funds pension lump sum. Once triggered, the amount you can contribute to money purchase pensions each year with tax relief is reduced from the standard GBP 60,000 annual allowance to a much lower MPAA limit, and you can no longer carry forward unused allowance for money purchase contributions. Importantly, the MPAA is not triggered by everything. Taking only your 25% tax-free lump sum and moving the rest into drawdown without drawing taxable income does not trigger it, and nor does buying most lifetime annuities or taking a small pot lump sum. It is the taxable flexible income that usually sets it off. Worked example: you are 58, still working, and you take GBP 4,000 of taxable drawdown income to cover a one-off cost. This triggers the MPAA. If you later wanted to pay a large bonus into your pension, say GBP 30,000, you would be limited by the MPAA rather than the GBP 60,000 allowance, and contributions above the MPAA would face an annual allowance charge at your marginal rate. This matters most for people who access a pension early but keep working and contributing. If you may want to keep building your pension, think carefully before triggering the MPAA, and consider taking only the tax-free element if that meets your need. Use the pension calculator to model contributions and the income-tax calculator to see the tax on any drawdown income. For the current MPAA figure and exactly which events trigger it, check gov.uk.

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