Navigating the money purchase annual allowance

The annual allowance is the maximum amount of pension contributions a person can make each year without incurring a tax charge. This limit applies to both the contributions made by that person, and those made on their behalf – such as by their employer.

The standard annual allowance for 2025/26 is £60,000, however this can be reduced for high earners via the tapered annual allowance (TAA), and for those who have accessed certain retirement benefits via the money purchase annual allowance (MPAA). In this article, I’ll examine the background and practicalities of the MPAA.

The MPAA was introduced on 6 April 2015 as part of pension freedoms, which gave individuals greater flexibility in how they could access their defined contribution pension savings. Before these reforms, retirees typically used their pension savings to purchase an annuity, or entered capped drawdown with limits on the amount of income they could draw. The reforms allowed for more flexible access, including the ability to take lump sums or drawdown income at will.

While these reforms offered more control over pension savings, they also opened the door to potential abuse of the system. Specifically, there was a risk that individuals could withdraw large sums from their pensions and then recycle these funds back into their pension schemes, thereby benefiting from tax relief multiple times. To mitigate this risk, the MPAA was introduced, capping the amount that can be contributed to money purchase (defined contribution) pension schemes with tax relief after benefits have been accessed flexibly.

The MPAA restricts contributions to money purchase arrangements to £10,000 per year before an annual allowance charge applies – that’s significantly lower than the standard annual allowance of £60,000. For the tax years 2017/18 to 2022/23, this limit was £4,000.

Once the MPAA has been triggered, it will continue to be in effect every year thereafter. This means that the reduced contribution limit will permanently apply to all money purchase pension contributions, regardless of any changes to a person’s financial situation or employment status.

When the MPAA applies

A person will be considered to have accessed pension freedoms if they take any of the following actions (or ‘trigger events’, as they’re known):

• Taking a flexible access drawdown: designating pension savings into a flexi-access drawdown fund and starting to withdraw a taxable income from it.
• Receiving an uncrystallised funds pension lump sum (UFPLS): Taking a lump sum directly from a pension fund without first moving it into drawdown also counts as accessing the pension.
• Taking income from a capped drawdown plan in excess of the capped maximum: Withdrawing income from a capped drawdown plan that exceeds the government-set cap.
• Purchasing certain annuities: Buying an annuity with features that allow actual, or possible, decreases in the amount of annuity payable.
• Taking a stand-alone lump sum from a pension pot with primary protection and a protected tax-free cash amount greater than £375,000.
• Receiving a scheme pension payment from a plan with fewer than 12 members, such as a Small Self-Administered Scheme (SSAS), other than through an annuity.
• Receiving a payment of any of the aforementioned benefits from an overseas pension scheme that has received tax relief.

Taking a scheme pension from a defined benefit (DB) scheme or purchasing a lifetime annuity does not trigger the MPAA. Additionally, merely taking a pension commencement lump sum (PCLS) without drawing any income from a drawdown arrangement does not trigger the MPAA.

When someone triggers the MPAA mid tax year, it is only contributions after the trigger event that are subject to the MPAA. The full annual allowance of £60,000 still applies over the tax year in question. Where the MPAA is not exceeded, a tax charge will only arise in the usual way if the annual allowance has been exceeded.

Example

Simon makes a one-off personal contribution of £30,000 (£24,000 net) on 6 April 2024.

He flexibly accesses benefits on 1 October 2024.

He then makes a further personal contribution of £10,000 (£8,000 net) on 5 April 2025.

His total contributions (£30,000 + £10,000) are tested against the annual allowance.

His contributions since the trigger event (£10,000) are tested against the MPAA. Neither allowance has been exceeded, so no tax charge arises.

MPAA and defined benefit schemes

Anyone who has triggered the MPAA will have an ‘alternative’ annual allowance for any other pension input amounts, for example accruals in defined benefit schemes. To make sure the same pension input amounts are not subject to a double annual allowance charge, any pension inputs tested against the MPAA are not tested against the alternative annual allowance. For most people, the alternative annual allowance will be £50,000, which is the £60,000 annual allowance less £10,000 MPAA.

Example

Scott is a 55-year-old with various pension arrangements. He has both DC and DB pensions.

Year 1:

• Scott has not accessed any of his pension savings, so he is subject to the standard AA of £60,000.
• He decides to contribute £40,000 to his DC pension, and has a DB accrual of £20,000.
• Total contributions are within the AA limit, so no tax charges apply.

Year 2:

• Scott decides to access his DC pension by going into flexi-access drawdown, and starts drawing taxable income. As a result, the MPAA is triggered.

Contributions after MPAA trigger:

• Scott contributes £12,000 to his DC pension and has an accrual of £20,000 in his DB pension.
  • For the DC pension: Since the MPAA limit is £10,000, he has exceeded this by £2,000, so he’ll face a tax charge on the £2,000 excess.
  • For the DB pension: The alternative annual allowance of £50,000 will apply. His £20,000 annual allowance usage is well within this limit, so no tax charges apply here.

MPAA and carry forward

Once the MPAA is triggered, the person also loses the ability to carry forward unused annual allowance from previous tax years. However, it’s still possible to use carry-forward to reduce or eliminate the tax charge arising from defined benefit pension contributions. Additionally, carry-forward can be applied to money purchase contributions made within the same tax year, provided these contributions occur before the MPAA trigger date.

Example

Sally triggered the MPAA in the 2024/25 tax year. She has both DC and DB schemes.

Sally’s pension contributions:

Previous tax years unused allowance:

• 2022/23: £20,000
• 2023/24: £15,000
• 2024/25: £10,000

Sally’s potential contributions / accruals in 2025/26:

• Defined contribution: Sally can only contribute £10,000 to her DC pension due to the MPAA.
• Defined benefit: Sally can have DB savings of up to £50,000 (alternative allowance) to her DB pension.
• She can also use the carry forward from previous years to increase this limit. Therefore, she can add up to £45,000 (total unused allowance) from the past three years, allowing a potential pension input of up to £95,000 (£50,000 current year allowance + £45,000 carry forward).

Total potential contributions:

• DC pension: £10,000 (MPAA limit)
• DB pension: £95,000 (including carry forward)

MPAA and the tapered annual allowance (TAA)

When a person is subject to both the tapered annual allowance and the MPAA, the taper is applied to their alternative annual allowance. The TAA reduces the standard annual allowance for high-income earners based on their adjusted income, which includes total taxable income plus pension contributions. For those with adjusted incomes over a certain threshold, the annual allowance is reduced by £1 for every £2 of income over the threshold, down to a minimum annual allowance.

The alternative annual allowance for people who are subject to the maximum taper will be zero. This is because the maximum taper reduces the annual allowance by £50,000, leaving a £10,000 allowance for those affected by just the TAA. When the MPAA also applies, this remaining £10,000 is fully offset, resulting in an alternative annual allowance of zero.

Information required when the MPAA is triggered

When a person first flexibly accesses their benefits, the scheme administrator must send them a 'flexible access' statement within 31 days of the trigger event. No statements are issued for subsequent events, or if the member has previously informed the scheme administrator that they have flexibly accessed benefits elsewhere.

The statement must tell the person:

• that they have flexibly accessed their pension savings;
• the date of the relevant trigger event;
• that if they make contributions in excess of £10,000 to money purchase arrangements, they will be liable to an annual allowance charge on the excess; and
• that they must tell other pension scheme administrators that they have flexibly accessed their benefits.

The person is then responsible for informing other money purchase schemes under which they are accruing benefits within 91 days (13 weeks) of receiving the statement. If they subsequently join another scheme, they must notify the new scheme administrator within 91 days.

Failure to notify other pension schemes that they have flexibly accessed benefits can result in a £300 fine for the person, with additional daily penalties of up to £60 for each day the failure continues after the initial £300 fine has been imposed.

The person does not need to notify a scheme if they joined the new scheme as a result of a recognised transfer from another registered pension scheme, as it is a requirement for the transferring scheme administrator to tell the receiving scheme.