What is the Money Purchase Annual Allowance and when does it apply?

Full answer

The Money Purchase Annual Allowance is a significant, easy-to-overlook restriction that can catch out people who start drawing a flexible pension income while still working and wanting to keep contributing to a pension. **What triggers the MPAA** The MPAA is triggered by specific actions that count as "flexibly accessing" a defined contribution pension -- most commonly, taking any taxable income from a flexi-access drawdown arrangement, or taking an uncrystallised funds pension lump sum (UFPLS) where part of the withdrawal is taxable. Simply taking your 25% tax-free pension commencement lump sum WITHOUT taking any further taxable drawdown income does NOT trigger the MPAA -- it is specifically triggered by taking taxable income, not by the tax-free element alone. **What does NOT trigger it** Buying a lifetime annuity, taking only the tax-free lump sum without further withdrawals, or remaining in a "capped drawdown" arrangement set up before April 2015 within its original cap, generally do not trigger the MPAA -- the rules distinguish between simply accessing tax-free cash or an annuity (not triggered) and taking flexible taxable income (triggered). **The reduced allowance** Once triggered, the MPAA reduces your Annual Allowance for contributions to DEFINED CONTRIBUTION pensions specifically to just £10,000 a year, a significant drop from the standard £60,000 -- and unlike the standard Annual Allowance, unused MPAA cannot be carried forward from previous years, since the whole point of the restriction is to prevent ongoing large contributions after flexible access has begun. **Why it exists -- preventing "recycling"** The MPAA was introduced to stop a specific form of tax planning where someone withdraws pension money (getting 25% tax-free), then immediately recontributes the same money back into a pension to claim a further round of tax relief on it -- effectively getting tax relief twice on the same money. By capping further contributions at £10,000 once flexible access begins, this recycling opportunity is largely closed off. **Impact on people still working after starting drawdown** This particularly affects people who begin drawing a flexible pension income (for example to supplement reduced hours or a partial retirement) while still working and wanting to continue building their pension -- once MPAA is triggered, their contribution allowance drops sharply, potentially limiting how much further tax-relieved saving they can do for the remainder of their working life. **Worked example** Someone aged 58 reduces to part-time work and starts taking £1,000 a month of taxable income from their drawdown pension to supplement their reduced salary, while also taking their tax-free lump sum. This taxable drawdown withdrawal triggers the MPAA, cutting their Annual Allowance for further pension contributions from £60,000 to £10,000 a year going forward -- if they were previously contributing £20,000 a year (including employer contributions) to a workplace pension, they would need to reduce future contributions to stay within the new £10,000 cap, or face a tax charge on the excess. **Practical tip** If you are still working and want to keep contributing significantly to a pension, consider whether you can meet income needs WITHOUT taking taxable drawdown income (for example using other savings, or taking only the tax-free lump sum) to avoid triggering the MPAA prematurely -- take financial advice before starting any flexible pension withdrawal if continuing large pension contributions is important to you.

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