Understanding the Money Purchase Annual Allowance (MPAA) and It’s Impact on Your Pension Planning
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
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What is the Money Purchase Annual Allowance (MPAA)?
The Money Purchase Annual Allowance (MPAA) is a little-known but crucial pension rule that can significantly impact your ability to save for retirement. It applies to individuals who have accessed their defined contribution pension flexibly and restricts the amount they can contribute to their pension whilst still receiving tax relief.
Under normal circumstances, the Annual Allowance for pension contributions is £60,000.00 per tax year (2024/25) subject to having sufficient relevant earnings. However, if you trigger the MPAA, this allowance drops drastically to £10,000.00, severely limiting your ability to build your pension pot further.
How Do You Trigger the MPAA?
You will trigger the MPAA if you take benefits from your defined contribution pension in a way that is considered ‘flexible’ by HMRC. Some common examples include:
· Taking an income from a flexi-access drawdown pot in excess of your tax-free 25% lump sum
· Receiving an uncrystallised funds pension lump sum (UFPLS) – a lump sum where 25% is tax-free, and the rest is taxed as income
However, certain actions do not trigger the MPAA, such as:
· Taking only the 25% tax-free lump sum
· Withdrawing from a defined benefit (final salary) scheme
· Buying a lifetime annuity with no flexibility
Real-Life Examples of the MPAA in Action
Example 1: John’s Early Retirement Trap
John, aged 57, decides to semi-retire. He withdraws £30,000.00 from his pension, keeping £7,500.00 tax-free and paying income tax on the remaining £22,500. He continues working part-time and wants to keep contributing to his pension. However, because he took taxable income from his pension, the MPAA kicks in, reducing his annual pension contribution limit to £10,000.00. He had planned to save £20,000.00 per year into his pension, but now he faces a significant restriction.
Example 2: Dave’s Smart Planning
Dave, 55, wants access to some of his pension but also wants to keep saving for retirement. Instead of drawing a taxable income, he only withdraws his 25% tax-free lump sum and reinvests the rest. Since he does not take any taxable income, the MPAA is not triggered, and he maintains his full £60,000.00 annual allowance. This strategy allows him to withdraw money without restricting future pension contributions.
Key Risks From Triggering The MPAA
· Severely restricts pension saving potential – £10,000.00 per year may not be enough for those who still wish to build their pension pot
· Could impact those who return to work – Many retirees access pensions early, then return to work later, only to find they can no longer make significant pension contributions
· No carry forward rule – Unlike the standard annual allowance, the MPAA does not allow unused allowances from previous years to be carried forward
How to Avoid Unintentionally Triggering the MPAA
If you want to access pension savings but keep your full annual allowance, consider these options:
· Only withdraw your 25% tax-free lump sum and leave the rest invested
· Use other savings first before accessing your pension
· Buy a lifetime annuity if a guaranteed income is preferable
· Take financial advice before making any withdrawals to understand the impact on your future contributions
Conclusion: Take Financial Advice Before Accessing Your Pension
The MPAA is an important rule that can catch many retirees and pension savers off guard. Once triggered, it permanently reduces your ability to contribute to a pension beyond £10,000.00 per year. If you are considering accessing your pension, it is essential to take independent financial advice from a suitably qualified adviser to avoid unnecessary tax restrictions and ensure your retirement plan remains on track and to help navigate the complexities of pension contributions and withdrawals. Planning ahead can save you from costly mistakes.