Money Purchase Annual Allowance 2026/27: Triggers and Traps

The Money Purchase Annual Allowance is one of the pension rules most commonly triggered accidentally, and the consequences are both permanent and potentially very costly. If you have started drawing an income from a defined contribution pension -- even a single flexi-access drawdown payment -- your ability to make new DC pension contributions is permanently restricted to £10,000 per year, down from the standard £60,000 annual allowance.

Why the MPAA Exists

The Money Purchase Annual Allowance was introduced to prevent a form of pension recycling: drawing pension money out flexibly, receiving tax relief on it (income taxed at the pension income rate), and then immediately reinvesting it back into a new pension contribution with fresh tax relief. Without the MPAA, someone could draw £40,000 from a pension, pay income tax on it, and then contribute £40,000 back in -- netting the tax relief on the re-contribution, which the government views as double-benefiting from the pension tax system.

The MPAA prevents this by severely limiting the amount of new DC contributions that attract tax relief once pension income is in payment.

What Triggers the MPAA

Not all pension withdrawals trigger the MPAA. The distinction between pension events that do and do not trigger it is critical and often misunderstood.

Triggers the MPAA:

• Taking your first payment from a flexi-access drawdown (FAD) fund -- even £1 of income
• Taking an Uncrystallised Funds Pension Lump Sum (UFPLS), where 25% is tax-free and 75% is taxable income
• Taking income from a capped drawdown fund that was set up before April 2015 (if the cap is removed and it converts to FAD)
• Receiving a scheme pension with fewer than 11 pensioner members if HMRC has not approved scheme pension status

Does NOT trigger the MPAA:

• Taking the 25% pension commencement lump sum (PCLS) tax-free cash and designating remaining funds to a FAD account but NOT yet taking any income
• Purchasing a lifetime annuity with the whole or part of your pension pot
• Taking small pension pot lump sums (up to £10,000 from up to 3 qualifying small pots, or up to 3 occupational pensions)
• Taking a serious ill-health lump sum
• Receiving a trivial commutation lump sum (total pension wealth below £30,000)
• Receiving a DB pension income

The 91-Day Reporting Obligation

When the MPAA is triggered, a formal reporting chain is required by law:

1. The pension scheme that made the first flexible payment must issue you a Flexible Access Statement within 31 days of the triggering event
2. You must then notify any other pension schemes where you are an active member within 91 days of the date you first triggered the MPAA
3. You must also notify your employer (if they contribute to your pension) within the same 91-day window

The purpose is to alert other pension providers to apply the MPAA limit to new contributions and to flag to employers that salary sacrifice or other pension contributions may need to be monitored.

Failure to notify within 91 days does not avoid the MPAA -- the MPAA still applies from the date of triggering -- but it can result in the employer or scheme inadvertently over-contributing, which then creates an annual allowance charge that the individual must resolve through self-assessment.

How the MPAA Works in Practice

Once triggered, the MPAA applies as follows in any tax year:

• Your total DC pension inputs (employee contributions + employer contributions + any other DC contributions) must not exceed £10,000
• This limit applies across all DC pensions you hold, not per scheme
• Carry forward of unused annual allowance from previous years cannot be used to increase contributions above £10,000

The £10,000 MPAA is a hard limit. If your employer contributes £8,000 per year into a workplace DC pension via salary sacrifice, and you additionally pay £3,000 in personal contributions, your total DC input is £11,000 -- £1,000 above the MPAA. You would face an annual allowance charge on that £1,000 excess.

The annual allowance charge is calculated at your marginal income tax rate on the excess. For a 40% taxpayer with £5,000 of excess above the MPAA, the charge is £2,000.

Interaction with Salary Sacrifice

Salary sacrifice arrangements require particular care after the MPAA is triggered, because employer contributions made via salary sacrifice count toward the MPAA limit alongside employee personal contributions.

Many people in their 50s and early 60s use salary sacrifice to maximise pension contributions before retirement. If they also start drawing from a small pension pot (to supplement income during a phased retirement), they may accidentally trigger the MPAA and find their salary sacrifice contributions now exceed the £10,000 limit.

Example scenario: An employee aged 62 sacrifices £15,000 per year into their workplace DC pension. They also draw a small income from a separate SIPP started earlier in their career. Drawing from the SIPP triggers the MPAA. Their workplace pension salary sacrifice contributions (£15,000) now exceed the £10,000 MPAA by £5,000 per year. An annual allowance charge at their marginal rate applies on the £5,000 excess until they stop contributing above £10,000.

The solution in this scenario is to reduce salary sacrifice contributions to within the £10,000 MPAA before drawing any drawdown income, or to delay the drawdown income until after stopping salary sacrifice contributions.

Avoiding the MPAA Trap in Phased Retirement

Many people approaching retirement draw on one pension while continuing to contribute to another. This is the classic MPAA trap. Strategies to avoid it:

Use tax-free cash before income. You can take the 25% PCLS from a pension (up to the lifetime limit for tax-free cash) and move the remainder to a drawdown account, without drawing any income from the drawdown fund. This releases cash without triggering the MPAA. You can fund living costs from the PCLS while continuing to contribute to other DC pensions.

Take a small pot withdrawal carefully. Small pots payments (from up to 3 personal pensions with funds below £10,000 each, or up to 3 occupational pensions) do not trigger the MPAA. If you have a very small old pension that you want to close, check whether it qualifies as a small pot.

Use annuity purchase instead of drawdown. Converting a pension fund to an annuity provides income without triggering the MPAA. If you want guaranteed income but also plan to continue contributing to a DC pension, annuity purchase avoids the MPAA restriction.

Stop DC contributions before triggering drawdown. If you are close to stopping work entirely, stopping employer and employee DC contributions before taking the first drawdown income may be simpler than managing the MPAA cap in the final working years.

Planning Around the £10,000 MPAA Limit

If you have already triggered the MPAA (perhaps years ago through an old pension arrangement), the focus shifts to maximising the £10,000 allowance you do have:

• Ensure employer and employee contributions together do not exceed £10,000
• Consider whether redirecting an employer contribution to a different benefit (such as life cover in a relevant life trust, or an EV company car) makes more sense than pension contributions above the limit
• DB pension accrual is unaffected -- if available, this is very valuable after MPAA is triggered

The Money Purchase Annual Allowance is a permanent and irreversible restriction that can catch people by surprise when they begin accessing their pension flexibly. Understanding exactly what does and does not trigger it, fulfilling the 91-day reporting obligations, and planning your pension access sequence carefully can prevent a costly mistake that affects your retirement savings capacity for the rest of your working life.