If you’ve started dipping into your pension savings but still want to contribute towards your retirement, there’s one rule you need to know about: the Money Purchase Annual Allowance (MPAA).

This little-known restriction could significantly reduce how much you’re allowed to save tax-free into your pension, potentially limiting your retirement planning options. So, before you take any withdrawals, it’s important to understand how the MPAA works – and how to avoid any costly tax surprises.

What Is the Money Purchase Annual Allowance?

The MPAA was introduced in April 2015 as part of pension freedoms. It was designed to stop ‘pension recycling’, where someone could withdraw money from their pension and then reinvest it to benefit from extra tax relief.

If you flexibly access your defined contribution (DC) pension, the MPAA means that your annual tax-free pension contribution allowance drops from £60,000 to just £10,000 (as of the 2023/24 tax year).

Who Does the MPAA Apply To?

You trigger the MPAA if you access your DC pension in the following ways:

• Taking a taxable lump sum (beyond the 25% tax-free portion)
• Going into flexible drawdown and withdrawing any amount
• Taking multiple lump sums rather than buying an annuity

Once the MPAA is triggered, you can’t go back to the original £60,000 limit – even if you stop taking withdrawals. Any contributions over the £10,000 limit will be taxed at your marginal income tax rate.

Who Doesn’t Need to Worry About the MPAA?

The MPAA does not apply if:

• You’ve only taken your 25% tax-free lump sum and left the rest untouched.
• You receive income from a defined benefit (final salary) pension.
• You buy an annuity without taking a lump sum first.

So, if you plan to take a tax-free lump sum but still contribute to your pension, you can do so without triggering the MPAA.

How to Avoid the MPAA Limiting Your Retirement Savings

If you’re still working and plan to keep adding to your pension, understanding the MPAA can help you avoid restrictions on your future contributions. Here are some key things to consider:

1. Delay Accessing Your Pension

If you don’t need to take withdrawals yet, keeping your full £60,000 allowance intact can give you more flexibility to save in the years ahead.

2. Maximise Employer Contributions

Remember, your employer’s pension contributions count towards the £10,000 MPAA limit. If you’re still working, ensure you’re getting the most out of any workplace pension schemes before you trigger the MPAA.

3. Use Other Tax-Efficient Savings

If you need extra income but don’t want to trigger the MPAA, consider using ISAs or other savings instead of drawing from your pension early.

4. Seek Financial Advice

Since pension rules can be complex, speaking to a financial adviser can help you find the best strategy for your situation. They can guide you on how to withdraw funds while keeping your tax bill as low as possible.

Plan Ahead to Make the Most of Your Pension

The MPAA is a rule that many people don’t realise exists until it’s too late. If you’re thinking about accessing your pension but still want to keep saving for retirement, make sure you understand how it will affect your tax-free contributions.

By planning ahead and considering alternative savings options, you can make the most of your retirement income – without any nasty tax surprises down the line.