What is the Money Purchase Annual Allowance (MPAA)?

The Money Purchase Annual Allowance (MPAA) is the amount of money you, or someone else can pay into your pension. This only applies after you've taken certain benefits from your defined contribution pension.

If you've taken benefits from any of your defined contribution pensions, either as a lump sum or as income drawdown, your pension contribution limit is £10,000. A tax charge applies if you exceed the £10,000. You'll still get tax relief. But, you'll be taxed on anything above the MPAA.

MPAA will only apply to defined contribution pensions. If you have any defined benefit pensions, your accrual under the scheme won't be affected. This includes those with guaranteed minimum pensions.

MPAA can be triggered in a few different ways, if you’ve:

• taken a flexi-access drawdown payment
• taken uncrystallised funds pension lumps sums
• taken a flexible annuity
• stand-alone lump sums
• scheme pensions from pension schemes with less than 12 pensioners
• payments from overseas pension schemes

find out more about retirement options

The MPAA does, however, exclude:

• pension commencement lump sum (tax-free cash)
• capped drawdown payments
• standard annuities
• defined benefit pensions 

You can also find a more exhaustive list on the gov.uk website

 

Your standard annual allowance is the amount of money you can pay into a pension and receive tax relief without having to pay a tax charge. This amount can depend on your personal circumstances.

MPAA comes into play when you have taken money from your pension, in the situations described above, but still want to contribute to your pot.

If you have any unused annual allowance, but you have triggered MPAA, you won't be able to use carry forward of unused allowance into your defined contribution pension. Carry forward works by letting you make use of the times in the last three years when you haven’t used your annual allowance, as long as you had a pension at the time. You can't use carry forward to make more personal contributions than your relevant UK earnings.

In both instances, if you go over your annual allowance, you will get a tax charge and will pay tax on any pension savings above your allowance.

Your pension provider should let you know if you’ve triggered your MPAA, but here are some handy tips to keep your payments on track:

• Keep tabs on and other contributions made by direct debit
• Double-check contributions on your providers app/website like MyAviva
• Receive advice from a financial adviser to help support you
• Make the most of your annual allowance

There are a few reasons you may not trigger MPAA:

1. Taking the 25% tax-free lump sum only

You’re usually able to take up to 25% of your pension pot as a tax-free lump sum, and this doesn’t trigger MPAA, as long as you leave the rest of your pension alone. This means you’ll be able to continue making contributions up to your full annual allowance without restrictions.

2. Buying a lifetime annuity

If you want to use your pension to buy a lifetime annuity that provides a guaranteed income for life, your MPAA is not triggered. By doing this you’re locking in your pension savings to a fixed income stream, so therefore aren’t getting flexible access.

3. Taking a small pension pot (under £10,000)

If you have pensions worth £10,000 or less, you can take up to three as a lump sum in your lifetime under the small pot rule.

4. Using a capped drawdown plan (established before April 2015)

If you have a capped drawdown arrangement from before pension freedoms, and you’re only able to withdraw within the capped limits, your MPAA won’t be triggered. However, if you exceed your capped limits or convert the plan into a flexi-access drawdown account, then MPAA will apply.

5. Taking a defined benefit (final salary) pension

If you have a defined benefit pension, like a final salary pension, drawing income from it won’t trigger MPAA. This is because defined benefit pensions don’t fall under the ‘flexible access’ rules that apply to a defined contribution pension.

6. Inherit a pension

If you inherit a pension as a beneficiary and decide to take it as drawdown, MPAA won’t trigger.