Money Purchase Annual Allowance (MPAA)

The Money Purchase Annual Allowance (also known as the 'MPAA') is a specific rule in the United Kingdom that limits the amount of money you can contribute to a defined contribution pension while still receiving tax relief, after you have started flexibly accessing your pension savings. Think of it as a reduced speed limit for your pension contributions once you start taking cash out. For the 2023/2024 tax year, this allowance is set at £10,000 per year. The standard annual allowance for most people is £60,000, so triggering the MPAA represents a significant drop. Its primary purpose is to stop a tax loophole called ‘pension recycling’—where someone could withdraw money from their pension, receive a tax-free portion, and then reinvest it into another pension to claim a second round of tax relief on the same cash. While it sounds like a technicality, accidentally triggering the MPAA can severely hamper your ability to save for the later stages of retirement, making it a critical rule for anyone approaching or in retirement to understand.

The government loves when you save for retirement, which is why it offers generous tax relief on pension contributions. However, it’s not keen on people gaming the system. Before the MPAA, a clever (but not entirely ethical) investor could exploit a loophole. Imagine you could take £20,000 from your pension. Under the rules, the first 25% (£5,000) would be tax-free. You could then take the remaining £15,000, pay income tax on it, and immediately put the full £20,000 back into your pension. Because you made a new contribution, you’d get tax relief on that £20,000 all over again. You’ve effectively ‘recycled’ your pension money to generate extra tax-free cash and tax relief from HMRC. The MPAA slams the door shut on this practice. By drastically lowering the amount you can contribute once you start taking flexible income, it makes recycling financially unappealing and protects the taxpayer.

Triggering the MPAA is often accidental, so knowing the tripwires is essential. It's not about how much you take, but how you take it.

You will trigger the MPAA if you take a payment using one of these methods:

• Taking an income payment from a flexible-access drawdown fund. This is the most common trigger.
• Taking an uncrystallised funds pension lump sum (UFPLS), where a portion of each withdrawal is tax-free and the rest is taxed as income.
• Taking more than the permitted maximum income from an older-style ‘capped’ drawdown plan.
• Buying a flexible annuity where the income you receive could decrease.

Crucially, you can access your pension without triggering the MPAA in several ways:

• Taking only your 25% tax-free lump sum and moving the rest of your pot into a drawdown fund, but not taking any income from it yet.
• Withdrawing a small pension pot valued at less than £10,000 in its entirety.
• Buying a lifetime annuity that provides a guaranteed income for life that cannot decrease.

Once you trigger the MPAA, the consequences are immediate and permanent.

• Reduced Contribution Limit: Your annual allowance for contributions to defined contribution schemes plummets from £60,000 to just £10,000 (2023/24). If you contribute more than this, you will face a tax charge on the excess.
• Loss of Carry Forward: You lose the ability to use carry forward. This valuable rule normally allows you to use up to three previous years’ unused allowances to make a large, one-off pension contribution. Once the MPAA is triggered, this benefit is gone for your defined contribution savings.
• It’s Forever: The MPAA is not a temporary penalty. Once triggered, it applies for the rest of your life. There's no going back.
• Impact on Different Pension Types: The MPAA applies specifically to contributions to defined contribution pensions. If you are also an active member of a defined benefit pension scheme, you will have what’s called an ‘Alternative Annual Allowance’ for that scheme, which is the standard annual allowance minus the £10,000 MPAA (£50,000 for 2023/24).

For a value investor, knowledge isn't just power; it's profit. The MPAA is a perfect example of a rule where a little foresight can prevent a massive, long-term financial mistake. The core principle here is planning. Triggering the MPAA isn't inherently bad—it’s a trade-off. If you need the income, you take it. The mistake is triggering it unwittingly when you still plan to work and save for several more years. Practical Insight: If you are nearing retirement but want to continue working, consider a phased approach. If you need some extra cash, look to other sources first, such as a cash savings account or a stocks and shares ISA. By drawing from these non-pension sources first, you can leave your pension untouched, preserving your full £60,000 annual allowance and the ability to use carry forward. This allows you to continue benefiting from compound growth and tax relief on significant contributions, a far more valuable long-term strategy than grabbing a small amount of pension cash too early. Always understand the consequences before you sign the paperwork to access your pension.