When pension freedoms were introduced in 2015, they gave savers greater flexibility and control over how and when to access their retirement pots. But with freedom came a new rule that still catches thousands of people out each year: the Money Purchase Annual Allowance, or MPAA.
According to the Financial Conduct Authority’s latest 2024/25 Retirement Income Market Review, only 30.6% of people took professional advice before accessing their pensions. That means the vast majority may have missed the fine print about what happens next and, in some cases, permanently restricted their ability to keep saving for retirement.
When reading this article, please bear in mind that tax treatment depends on your circumstances and is subject to change.
The MPAA limits how much you can pay into defined contribution pensions each year and still receive tax relief once you’ve started taking taxable income from your pot.
Under current rules, the standard annual allowance is £60,000 (or 100% of earnings if lower). But if you trigger the MPAA, this allowance drops to £10,000 a year, and that change is permanent.
It applies to all money purchase pensions, such as personal pensions, workplace defined contribution schemes, and SIPPs. It doesn’t affect defined benefit (final salary) schemes.
The key point is that you only trigger the MPAA when you take taxable income from your pension not when you just take the 25% tax-free cash. For example:
You will not trigger the MPAA if:
You will trigger the MPAA if:
Once triggered, you can still pay more than £10,000 into pensions if you wish, but you won’t get tax relief on the excess. HMRC will claw back any over-claimed relief through your tax return or PAYE adjustment.
The FCA data shows that most people access their pension without advice. This could result in decisions being made based on short-term needs without realising the long-term consequences. Let’s consider a few common scenarios:
Someone withdraws £5,000 from their pension for a home repair. Because it’s taken as taxable income rather than tax-free cash, the MPAA is triggered, permanently cutting their future allowance to £10,000.
Others plan to take money out temporarily, intending to top up again once finances improve. Unfortunately, once the MPAA applies, they can never restore the full allowance.
For those still working, triggering the MPAA can mean valuable employer contributions stop or become taxable, reducing take-home pay or long-term growth.
In short: a single mistimed withdrawal can permanently restrict your ability to rebuild your pension savings.
The rule was designed to stop people recycling pension tax relief, for example, drawing pension income and then immediately reinvesting it to claim tax relief again.
It’s a reasonable aim, but it has an unintended side effect: penalising ordinary savers who take money out in good faith without realising the rule exists. It’s fair to say that most people accessing pensions for the first time aren’t doing so with complex tax strategies on their mind, they’re simply reacting to life events. That’s why awareness of the MPAA is so important.
There are a few practical ways to access your pension flexibly without triggering the MPAA:
If you’ve already started flexible drawdown or taken taxable lump sums, the MPAA will apply automatically. You’ll usually receive a flexible access statement from your provider confirming the date it was triggered.
You must tell any other pension providers you contribute to within 91 days, or you could face penalties. From that point, you can still contribute up to £10,000 a year with tax relief, build additional savings via ISAs, and continue benefiting from employer contributions (subject to tax treatment). But if you were planning to rebuild your pension aggressively later in life, perhaps after selling a business or returning to work, this rule could significantly limit your options.
The MPAA highlights a simple truth: tax rules and retirement strategies need to work together. What looks like a small, sensible withdrawal today could limit your choices for years to come.
That’s why many advisers now build MPAA-awareness into every retirement plan. Sometimes the best move is not to take money, or to use other resources first, for example, ISAs, cash savings, or taxable investments that don’t affect pension allowances.
A regulated adviser can help you:
In many cases, avoiding a single tax mistake can save far more than the cost of advice itself.
The Money Purchase Annual Allowance isn’t a new rule, but it’s still one of the least understood.
The FCA’s data shows most people access pensions without advice. This means that each year many people discover too late that one small withdrawal has permanently cut their allowance from £60,000 to £10,000.
With careful planning, this can be avoided. Know the rules, check before you act, and if in doubt, ask for advice. Your future self will thank you.
Paul Dunne
CEO
Chartered Financial Planner and Fellow of the Personal Finance Society
This article is for information only and is not a personal recommendation. If you are considering taking money from your pension, seek regulated financial advice before doing so.
