Quick Summary
What it is: The money purchase annual allowance (MPAA) reduces your pension contribution limit from £60,000 to £10,000 per year once you start drawing flexibly from a defined contribution pension
Is it permanent? Yes. Once triggered, the MPAA cannot be reversed, regardless of how your circumstances change
What triggers it: Taking taxable income from a flexi-access drawdown arrangement, taking an uncrystallised fund pension lump sum (UFPLS), or receiving income from a flexible annuity
What does NOT trigger it: Taking only your 25% tax-free cash (as long as no taxable income is taken afterwards), drawing income from a final salary pension, buying a standard annuity, or cashing in a small pot under £10,000 as a lump sum
Carry forward: Once the MPAA is triggered, you lose the ability to use carry forward rules for defined contribution pensions
Who is most at risk: People reducing their working hours while drawing pension income, and those who cash in pension pots without taking advice first
Best way to avoid it: Take only your 25% tax-free cash without drawing income afterwards, use small pension pots first, or draw from a defined benefit pension before touching a defined contribution pot
The money purchase annual allowance, or MPAA, is one of the most important pension rules you need to know before you take any money from your pension pot. It is a permanent reduction in how much you can save into a pension once you start drawing from it. And unlike most pension rules, once it is triggered, there is no way to undo it.
Most people are completely unaware of the money purchase annual allowance until it is too late. Research by Royal London found that around one in three people aged 55 to 64 have already triggered it, many without realising. If you are thinking of accessing your pension before you fully retire, this is the single most important rule to understand first.
This guide explains what the money purchase annual allowance is, exactly what triggers it, what does not, how it affects your future savings, and how to access pension money without triggering it at all.
What is the money purchase annual allowance (MPAA)?
The money purchase annual allowance is a reduced annual allowance that applies once you have made a taxable withdrawal from a defined contribution pension, also known as a money purchase pension.
Under normal rules, most people can contribute up to £60,000 per year into their pension and receive tax relief. However, once the money purchase annual allowance is triggered, that limit drops permanently to just £10,000 per year for defined contribution pensions. For a full explanation of how the standard £60,000 allowance works, see our pension annual allowance guide.
The money purchase annual allowance was introduced after pension freedoms came into effect in 2015. Before pension freedoms, most savers had to buy an annuity with the majority of their pension pot. After 2015, people could take their pension however they liked from age 55. The money purchase annual allowance was introduced to prevent people from exploiting this flexibility by repeatedly withdrawing money and reinvesting it to claim tax relief multiple times.
What triggers the money purchase annual allowance?
The money purchase annual allowance is triggered when you access your pension flexibly. Understanding exactly what counts as flexible access is critical because the consequences are permanent.
The following actions will trigger the money purchase annual allowance:
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"1 in 3 people aged 55 to 64 have already permanently cut their pension saving limit from £60,000 to £10,000 without realising. It is called the MPAA and it cannot be reversed."
𝕏 Share this on X- Taking taxable income from a flexi-access drawdown arrangement set up after April 5, 2015
- Taking an uncrystallised fund pension lump sum (UFPLS) that includes a taxable elemen
- Receiving income from a flexible annuity or fixed-term annuity
- Exceeding the income cap in a capped drawdown plan set up before April 6, 201
- Having flexible drawdown in place before April 6, 2015
What does NOT trigger the money purchase annual allowance?
This is just as important to understand. The following actions do not trigger the money purchase annual allowance:
- Taking only your 25% tax-free cash and moving the remainder into drawdown, as long as no taxable income is taken from that pot afterwards
- Taking a small pension pot worth £10,000 or less as a lump sum (limited to 3 personal pension pots; unlimited workplace pension pots)
- Taking income from a defined benefit (final salary) pension
- Buying a standard (non-flexible) lifetime annuity
- Taking income from a capped drawdown plan set up before April 6, 2015, as long as you stay within the cap
Taking your tax-free cash while still working: what you need to know
This is a question many people in their 50s get wrong, and it is worth explaining clearly.
Taking your 25% tax-free cash on its own does NOT trigger the money purchase annual allowance. Moving the remaining 75% into a drawdown pot is also fine, as long as you do not draw taxable income from it. Your workplace pension contributions from both you and your employer can continue completely unaffected.
However, the moment you start taking taxable income from that drawdown pot, the money purchase annual allowance is triggered. From that point, total contributions to all your defined contribution pensions are capped at £10,000 per year.
A worked example: tax-free cash at 55 with workplace pension continuing
The lesson here is simple: taking your tax-free cash is safe. Starting to draw taxable income from drawdown is what triggers the restriction. If you are unsure which category your planned withdrawal falls into, speak to a financial adviser before you act.
Money purchase annual allowance: triggers at a glance
| Action | Triggers MPAA? |
|---|---|
| Taking 25% tax-free cash only, rest to drawdown, no taxable income drawn | No |
| Taking taxable income from a flexi-access drawdown pot | Yes |
| Cashing in a small pot under £10,000 as a lump sum | No |
| Taking an uncrystallised fund pension lump sum (UFPLS) | Yes |
| Income from a final salary or defined benefit pension | No |
| Buying a standard lifetime annuity | No |
| Income from a flexible or fixed-term annuity | Yes |
| Taking tax-free cash only from capped drawdown (within cap) | No |
How does the money purchase annual allowance work in practice?
Once the money purchase annual allowance is triggered, your annual allowance for defined contribution pensions drops from £60,000 to £10,000 per year. This £10,000 covers everything: your own contributions, your employer’s contributions, and government tax relief combined.
Does the money purchase annual allowance affect carry forward?
Yes, and this is a significant consequence that many people overlook. Once the money purchase annual allowance applies, you lose the ability to use carry forward rules for your defined contribution pensions. You cannot use unused allowances from previous years to go above £10,000. The £10,000 limit is a hard cap with no flexibility.
Does the money purchase annual allowance affect defined benefit pensions?
No. The money purchase annual allowance only restricts contributions to defined contribution pensions. If you continue to build up benefits in a final salary or defined benefit pension scheme, those contributions are governed by the standard annual allowance rules. However, managing both types simultaneously is complex, and it is worth taking advice to ensure you do not accidentally breach either limit.
What happens if you exceed the money purchase annual allowance?
If your total contributions to defined contribution pensions exceed £10,000 in a year where the money purchase annual allowance applies, you will face an annual allowance tax charge. This charge effectively removes the tax relief on the excess amount. It is added to your income for the year and taxed at your marginal rate. You must declare it on a self-assessment tax return.
If you return to work after triggering the money purchase annual allowance and your employer’s pension contributions would push you over £10,000, it is your responsibility to inform your employer and ask them to cap contributions. Your pension provider will not do this for you automatically.
Why the money purchase annual allowance matters most if you are still working
The money purchase annual allowance is most dangerous for people who access their pension early but continue working afterwards. This is increasingly common as more people choose to gradually wind down their careers rather than retiring abruptly.
This is especially relevant if you are thinking about retirement planning alongside a pension. It is worth reading our pension vs ISA comparison to understand how ISAs could provide a source of income that does not touch your pension pot at all, keeping your MPAA protection intact.
This scenario is far more common than people realise. According to Royal London, around one in three people aged 55 to 64 have already triggered the money purchase annual allowance. Many did so without understanding the long-term impact on their ability to save.
How to access pension money without triggering the money purchase annual allowance
The good news is that there are several ways to take money from your pension without triggering the money purchase annual allowance. If you need cash and want to protect your full £60,000 annual allowance, consider these options first.
Option 1: Take only your tax-free cash, do not draw income from drawdown
You can take up to 25% of your pension pot as a tax-free lump sum and move the remaining 75% into a drawdown pot, without drawing any taxable income from it. This does not trigger the money purchase annual allowance. Your full £60,000 annual allowance remains intact, and your employer can continue contributing as normal.
Option 2: Use small pension pots before touching your main pension
If you have old pension pots from previous employers worth £10,000 or less, you can cash these in as a lump sum without triggering the money purchase annual allowance. You can do this with up to three personal pension pots and an unlimited number of workplace pension pots. 25% of each withdrawal is tax-free; the remaining 75% is taxed as income.
Option 3: Draw from a defined benefit pension first
If you have both a defined benefit (final salary) pension and a defined contribution pension, drawing income from the defined benefit pension does not trigger the money purchase annual allowance. This allows you to supplement your income while keeping your defined contribution pension and its full £60,000 allowance completely untouched.
Option 4: Consider an ISA as an alternative income source
If you have built up savings in an ISA, withdrawing from that instead of your pension pot means your pension remains completely untouched and your money purchase annual allowance is never triggered. ISA withdrawals are tax-free and do not count as income. See our pension vs ISA guide for a full comparison of both options.
What to do once you have triggered the money purchase annual allowance
If you have already triggered the money purchase annual allowance, there are still steps you can take to manage the situation effectively.
1. Inform all your pension providers within 91 days of receiving notification from your triggering provider. Once triggered, you are legally required to notify all providers you have pensions with. They will each need to know the money purchase annual allowance applies so they can monitor contributions correctly.
2. Tell your employer if their contributions could exceed £10,000. Your employer has no way of knowing the money purchase annual allowance applies unless you tell them. Ask them to adjust contributions if necessary.
3. Track total contributions carefully across all pots. The £10,000 limit covers everything paid in from all sources. With multiple pots it is easy to lose track. Keep a running total throughout the tax year.
Longer-term steps to protect your retirement savings
4. Consider maximising your defined benefit pension if you have one. Contributions to a defined benefit scheme are not restricted by the money purchase annual allowance, so building up defined benefit entitlements may still be possible.
5. Take financial advice. The interaction between the money purchase annual allowance, the standard annual allowance, and defined benefit pensions is genuinely complex. A qualified financial adviser can help you make the most of what remains available to you. You can book a free session with us at kiasconsultingpro.com/book.
Money purchase annual allowance: frequently asked questions
Q: Will my pension provider warn me before I trigger the money purchase annual allowance?
Your pension provider is required to inform you in writing within 31 days if a withdrawal you make triggers the money purchase annual allowance. However, this warning comes after the event, not before. It is your responsibility to understand the rules before you make any withdrawal. If you were not warned and believe this caused you financial loss, you may have grounds for a complaint to your provider or the Financial Ombudsman Service.
Q: Does the money purchase annual allowance apply to SIPPs?
Yes. The money purchase annual allowance applies to all defined contribution pensions, including Self-Invested Personal Pensions (SIPPs), workplace defined contribution schemes, and personal pensions. If you trigger it through one pot, it applies to all of them.
Q: I triggered the money purchase annual allowance years ago. Can I reverse it?
No. The money purchase annual allowance is permanent once triggered. There is no mechanism to revert to the standard £60,000 annual allowance, regardless of whether your circumstances change, whether you stop drawing from your pension, or whether you return to full-time employment.
Q: Does the money purchase annual allowance affect my state pension?
No. The state pension is entirely separate from the money purchase annual allowance. The MPAA only affects contributions to private defined-contribution pensions. Your state pension entitlement is based on your National Insurance record and is completely unaffected. For more on how your National Insurance record affects your retirement, see our National Insurance guides
Q: What is the difference between the money purchase annual allowance and the standard annual allowance?
The standard annual allowance of £60,000 applies to most pension savers who have not yet accessed their pension flexibly. The money purchase annual allowance of £10,000 replaces the standard allowance for defined contribution pension contributions once you have made a flexible withdrawal. The two allowances cannot be used together for defined contribution pensions. For a full explanation of the standard allowance, read our pension annual allowance guide.
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