This guide is for financial advisers only. It mustn't be distributed to, or relied on by, customers. It is based on our understanding of legislation as at December 2023.
Individuals who flexibly access pension benefits from money purchase arrangements are subject to a money purchase annual allowance (MPAA). The MPAA limits the amount of contributions to money purchase arrangements on which tax relief is available. HM Revenue and Customs (HMRC) introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the pensions flexibility rules.
The MPAA was introduced on 6 April 2015 and was £10,000 pa for the 2015/16 and 2016/17 tax years. (Special arrangements were put in place for the 2015/16 tax year when pension input periods were aligned to tax years. You can find out more on the government website.)
The MPAA was reduced from £10,000 to £4,000 from 6 April 2017, but returned to £10,000 from 6 April 2023.
Since 6 April 2015, a reduced annual allowance in respect of money purchase pension contributions, known as the money purchase annual allowance (MPAA), applies to individuals who have flexibly accessed their money purchase pension benefits.
It is only when pension benefits have been flexibly accessed that the MPAA will apply. This includes various benefit options (known as trigger events) such as:
- Taking an uncrystallised funds pension lump sum (UFPLS).
- Taking an income, or buying a short term annuity, from flexi-access drawdown funds. This applies to flexi-access drawdown funds arising from;
- the designation of uncrystallised funds, or
- an existing capped drawdown arrangement.
- Taking income above the maximum GAD limit from an existing capped drawdown arrangement.
- Having a flexible drawdown fund at any time before 6 April 2015 as a member (not a dependant). This applies regardless of whether income had been taken from the flexible drawdown fund or whether the fund still existed at 6 April 2015.
- Taking a stand-alone lump sum from a money purchase arrangement where someone has primary protection and a protected tax-free lump sum greater than £375,000 at 5 April 2006.
- Becoming entitled to a lifetime annuity on or after 6 April 2015 where the terms of the annuity contract allow actual or possible decreases in the amount of annuity payable, other than in prescribed circumstances.
A payment of one of the types of benefits listed above from an overseas pension scheme that has benefitted from UK tax relief, eg where a transfer has been made from a UK registered pension scheme to a qualifying recognised overseas pension scheme, is also a trigger event.
The MPAA will not apply in the following circumstances:
- Taking income from an existing capped drawdown arrangement which is within the GAD limit.
- Taking a pension commencement lump sum, and
- buying a lifetime annuity (i.e. not accessing new flexible annuity options), or
- moving to a flexi-access drawdown arrangement and taking NO income.
- Taking a small pots lump sum.
- Taking income from a beneficiary’s flexi-access drawdown.
A trigger event will not occur where the whole of the fund is made up of a disqualifying pension credit at the time of a payment from the member’s flexi-access drawdown fund. A disqualifying pension credit is where the pension credit in relation to a pension sharing order comes from benefits already in payment.
The trigger date is generally immediately before benefits have first been flexibly accessed (i.e. the date of the first trigger event). Further details of what the trigger date is can be found in HMRC’s Pensions Tax Manual.
There are some information requirements that must be met once benefits are flexibly accessed. Broadly -
- When an individual first flexibly accesses benefits, the pension provider involved must notify the individual of the trigger date, including an explanation of the possible implications, within 31 days of that date. This notification is known as a 'flexible access statement'.
- The individual must then pass that information on to all other administrators of money purchase pension schemes they are contributing to. They must do this within 91 days of the date of receipt of the flexible access statement. If money purchase contributions start being made to another pension scheme at a later date the individual must notify that scheme that the MPAA applies to them within 91 days of the contributions starting.
- If a pension provider knows that an individual has flexibly accessed their benefits (whether from the scheme they administer, or from another scheme) and the individual transfers their fund, the transferring provider must tell the receiving provider this, and confirm the trigger date.
- Pension providers must automatically provide a pension savings statement to an individual who they know, or believe, has flexibly accessed their pension benefits.
The MPAA only applies to money purchase contributions being made. So it is still possible for an individual to accrue benefits in a defined benefits scheme up to the current full annual allowance of £60,000, but taking into account any money purchase contributions that will be counted against the MPAA as detailed above. If the money purchase contributions exceed the MPAA then an ‘alternative annual allowance’ (the full annual allowance minus the MPAA) will apply to any defined benefits accrual. Any unused annual allowance from the previous three tax years can be carried forward and this will increase the individual's annual allowance.
From the 2023/24 tax year, the alternative annual allowance will be £50,000 pa (£60,000 less a £10,000 MPAA) or a lesser amount if the tapered annual allowance also applies to the individual in a tax year. See Where both the tapered annual allowance and the MPAA apply for more information.
In the first tax year that the MPAA applies, it is only contributions paid to money purchase arrangements after the date of the trigger event that are measured against the MPAA. For subsequent tax years, all contributions made to money purchase arrangements in a tax year will count towards the MPAA.
The following is a very basic example of how money purchase pension contributions are treated in the tax year that the first trigger event applies.
- Employer pays monthly contributions of £2,000 on the 1st of each month.
- Pension input period (PIP) is tax year 2023/24.
- Employee takes an UFPLS on 1 October 2023 – this is a trigger event.
Contributions paid from 1 May 2023 to 1 October 2023 inclusive
6 x £2,000 = £12,000
1 October 2023
Contributions paid from 1 November 2023 to 1 April 2023 inclusive
6 x £2,000 = £12,000
The contributions paid before or on the trigger date will be measured against the alternative annual allowance (£60,000 less the MPAA). Those paid after the trigger date are measured against the MPAA. In this example, an annual allowance tax charge would arise as contributions after the trigger event exceed the £10,000 MPAA.
For tax year 2024/25 onwards, if contributions were to continue at £2,000 per month, the full annual contribution total of £24,000 would be tested against the MPAA.
If a member is subject to the MPAA, the statutory conditions for scheme pays still have to be met before the member has a right to use scheme pays. This means that their pension input amount to the scheme still has to exceed the full annual allowance (currently £60,000), and not just exceed the MPAA, before the scheme has to pay part or all of the member’s annual allowance charge, if requested to. Additionally, the maximum amount of annual allowance charge that a member can require their scheme to pay on their behalf is the tax charge that relates to their pension input amount in excess of the full annual allowance. See our separate Scheme pays guide for more information.
An individual cannot use carry forward to reduce a charge on a money purchase input amount above the MPAA in the current tax year. In other words, you cannot use carry forward allowances to make or justify money purchase contributions in excess of the MPAA. Carry forward can, however, be used to make or justify any pension savings above the alternative annual allowance (the full annual allowance minus the MPAA) for any defined benefits accrual.
Where the MPAA provisions apply in the current tax year, the amount that can be accrued under defined benefit schemes will depend on whether the money purchase input total for the current tax year is more than the MPAA.
Where a member has flexibly accessed their pension rights, and they have exceeded their MPAA for the current tax year, any unused annual allowance can be carried forward from the previous three tax years and added to the alternative annual allowance, or if applicable, the individual’s tapered annual allowance, for any defined benefits pension savings.
Where the MPAA has not been exceeded in a tax year, the maximum annual allowance amount available for that tax year is based on the full annual allowance or, if applicable, the individual’s tapered annual allowance in the tax year.
Where someone is subject to the tapered annual allowance (see the Tapered Annual Allowance section of this guide) and they are also subject to the MPAA, the taper is applied to their alternative annual allowance amount. The alternative annual allowance amount is the full annual allowance less the MPAA.
From tax year 2020/21, the alternative annual allowance for a tax year where the maximum taper provisions apply will be nil. This is because the maximum taper is currently £50,000 meaning individuals who are subject to the maximum taper have a £10,000 annual allowance. The alternative annual allowance is worked out by deducting the MPAA from the tapered annual allowance i.e. £10,000 - £10,000 = nil. However, it will be possible to carry forward any unused alternative annual allowance for defined benefit pension savings from the previous three tax years.
You can find more information on the MPAA in HMRC’s Pensions Tax Manual at: