Money purchase annual allowance explained

The MPAA was introduced alongside pension freedoms on 6 April 2015. It limits the maximum amount of pension savings an individual can make each year to money purchase pension schemes with the benefit of tax relief. It only applies to people who have flexibly accessed their pension.

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Key insights on the money purchase annual allowance (MPAA)

What is the MPAA?

Anyone who flexibly accesses their pension will trigger the MPAA, which reduces their annual allowance for money purchase pension contributions to £10,000.

What does ‘flexibly accessed’ mean?

The MPAA applies to an individual who takes any of the following payments:

• a flexi-access drawdown pension payment;
• capped drawdown income above the capped maximum;
• an uncrystallised funds pension lump sum (UFPLS); or
• their first income payment from a flexible annuity.

What doesn’t trigger the MPAA?

The following events are not trigger events for the MPAA:

• taking a pension commencement lump sum (PCLS);
• income from a capped drawdown fund that does not exceed the cap;
• any payment from a lifetime annuity that cannot decrease in amount;
• payment of a scheme pension from a defined benefit scheme; and
• taking a beneficiary’s flexi-access drawdown payment.

MPAA and carry-forward

Once the MPAA has been triggered, it is no longer possible to use carry-forward in relation to money purchase contributions made after the trigger date. However, it is still possible to use carry-forward to reduce or eliminate the tax charge arising from defined benefit pension inputs.

How does the annual allowance test work in the year the MPAA is triggered?

When someone triggers the MPAA, 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.

What about those who have defined benefit accrual as well?

Anyone who has triggered and exceeded the MPAA will have an ‘alternative’ annual allowance (Alternative AA) for any other pension input amount – i.e., for DB accrual. 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 AA. For most people, the Alternative AA will be £50,000 (£60,000 AA less £10,000 MPAA).

More Bitesize Technical

View the full Bitesize Technical series on pension contributions, as well as our two stand-out videos on transitional arrangements and testing pension benefits, via Techcentre.