Money Purchase Annual Allowance (MPAA)

You can get tax relief on pension contributions up to £40,000 a year or 100% of your taxable salary. But if you start taking money from a defined contribution pension scheme, the amount you can pay into a pension and still get tax relief reduces. Read on to find out more.

Currently you can pay up to £40,000 a year (or 100% of your salary) into a pension scheme and get tax relief on your contributions. This is known as your Annual Allowance. However, if you start to take money from a defined contribution pension, the amount you can pay into a pension and still get tax relief reduces. This is known as the Money Purchase Annual Allowance or MPAA.

As a basic guide, the main situations when you’ll trigger the MPAA are:

• If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
• If you put your pension pot money into a flexi-access drawdown scheme and start to take an income
• If you buy an investment-linked or flexible annuity where your income could go down
• If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap

The MPAA won’t normally be triggered if:

• You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
• You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
• You cash in small pension pots valued at less than £10,000

The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

The MPAA is £4,000 for the 2020/21 tax year.