THE MONEY PURCHASE ANNUAL ALLOWANCE (MPAA) AND HOW TO AVOID IT

The Money Purchase Annual Allowance (MPAA) was introduced alongside the 2015 ‘freedom and choice’ reforms. Its purpose is to prevent “pension recycling”—where individuals access their pension flexibly and then reinvest the resulting income back into a money purchase pension to gain a second round of tax relief. Defined Benefit (DB) schemes are excluded due to their relative inflexibility.

Once triggered, the MPAA applies permanently and significantly restricts the amount that can subsequently be contributed to money purchase arrangements with tax relief.

Triggering the MPAA

The MPAA is currently set at £10,000. It is triggered when an individual “flexibly accesses” their pension benefits. Common trigger events include:

• Taking income from a flexi-access drawdown pension.
• Taking an Uncrystallised Funds Pension Lump Sum (UFPLS).
• Exceeding the GAD income limit in a capped drawdown pension.
• Purchasing a flexible annuity arrangement.
• Taking a stand-alone lump sum with Primary Protection and tax-free cash rights greater than £375,000 as at 5 April 2006.
• Having previously set up a flexible drawdown fund at any point prior to 6 April 2015 (irrespective of whether any income was paid).

How the allowance operates

Once triggered, the £10,000 limit applies to all money purchase (defined contribution) input paid by the member, their employer, or any third party.

• No Carry Forward: While carry forward is available for the standard and tapered annual allowances, it is not available for the MPAA.
• Mid-Year Triggers: If triggered mid-tax year, only money purchase input after the trigger date counts toward the MPAA. However, the total input for the year is still tested against the standard annual allowance.
  1. Interaction with DB arrangements: If a client accrues benefits in both money purchase and DB arrangements, the rules vary based on whether the MPAA is breached:
  2. If the MPAA is NOT breached: The annual allowance for both types of input is £60,000 (plus any available carry forward).
  3. If the MPAA is breached: An annual allowance charge applies to the amount in excess of the MPAA. The “alternative annual allowance” for the defined benefit input is £50,000 (which may be adjusted by tapering or carry forward).

When both allowances are exceeded

In complex cases where a client exceeds both the £10,000 MPAA and the “alternative annual allowance” for their defined benefit input, a specific calculation is required to determine the tax charge.

To find the correct chargeable amount, you must compare two figures:

1. The Alternative Chargeable Amount: This is the sum of the excess above the MPAA plus the excess above the available annual allowance for defined benefits.
2. The Default Chargeable Amount: This is simply the difference between the total pension input (both DC and DB) and the standard £60,000 annual allowance.

The annual allowance charge is then based on the higher of these two amounts.

Examples

• Example 1: Mike earns £80,000 and is subject to the MPAA. He contributes £12,000 to a personal pension and has £40,000 of DB input. Because his DC input exceeds the £10,000 MPAA, the £2,000 excess is subject to an annual allowance charge.  His DB input is lower than £50,000 and the balance can be carried forward although it can’t increase the MPAA.
• Example 2: The following year, Mike reduces his personal pension contributions to £6,000, but his DB input rises to £58,000. Since he did not exceed the MPAA, his total input (£64,000) is tested against the standard allowance. Because he has £10,000 of carry forward from the previous year (see Example 1), no charge applies.

How to avoid the MPAA

With careful planning, money purchase benefits can be accessed without triggering the restriction:

• Withdrawing tax-free cash only without taking an income.
• Taking a “small pot” payment.
• Purchasing a “non-flexible” annuity.
• Withdrawing income from a capped drawdown arrangement within GAD limits.
• Taking income from a beneficiary’s flexi-access drawdown pension.

As the rules surrounding the MPAA are both complex and permanent, the importance of proactive pension planning cannot be overstated. Once the MPAA is triggered, it creates a lifelong restriction on an individual’s ability to rebuild their retirement savings through money purchase schemes, with no option to use carry-forward relief to mitigate the impact.

Care must be taken when instructing withdrawals from pension providers, as even a single payment—if processed as flexi-access drawdown income or an UFPLS—can inadvertently lock a client into these harsher limits. Before accessing any pension wealth, it is vital to verify whether the desired outcome can be achieved through non-triggering methods, such as small pot payments or tax-free cash only, to preserve future tax-efficient saving capacity.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change. Tax treatment depends on individual client circumstances and may change in the future.