What is the money purchase annual allowance?

The money purchase annual allowance is £10,000 a year. It replaces the standard pension annual allowance for anyone who has started taking taxable income from a defined contribution pension, and it applies from the moment the first such payment is taken. The standard annual allowance is £60,000, so the change cuts the amount that can be paid in each year while still attracting tax relief from £60,000 to £10,000¹.

The rule exists because pension saving is tax-advantaged on the way in. Once someone begins drawing taxable income out, the reduced limit stops them recycling that money straight back into a pension to collect relief a second time. It was introduced in April 2015 as part of the pension freedoms².

Two things surprise people most. The first is that taking only the 25% tax-free lump sum does not trigger it, so the full allowance survives that step³. The second is that once the MPAA applies, unused allowance from earlier years cannot be brought forward to top it up⁴.

Money purchase annual allowance: £10,000 a year instead of £60,000

The figure is set in legislation. The Finance Act 2023 substituted £10,000 for £4,000 with effect from the 2023-24 tax year and subsequent tax years⁹. The government's own rates and allowances table lists the Money Purchase Annual Allowance at £10,000¹⁰.

Before that change the limit had been £4,000, and some older documents still quote that figure⁶. Where a provider's terms or a guidance page still says £4,000, it is out of date. The current figure is £10,000, and provider terms confirm it: the Transact SIPP terms state that "The money purchase annual allowance is currently £10,000."¹¹

The reduction is from £60,000 to £10,000, not from £40,000. Independent guidance describes the drop as taking the amount that can be paid in each year while still getting tax relief "from £60,000 to just £10,000"¹. Some sources describe the standard allowance as £40,000, which reflects the position before the 2023 increase; the current standard figure is £60,000¹.

The MPAA is a variation of the annual allowance rules, not a separate tax. It sits alongside the tapered annual allowance, which reduces the standard allowance for higher earners, and the money purchase limit applies on top of whatever the tapered figure would otherwise be¹².

What triggers the MPAA, and what does not

The MPAA applies to people who have taken taxable income from a defined contribution pension⁴. A defined contribution pension is also called a money purchase pension, which is where the allowance gets its name¹³.

The main trigger events are:

• Taking income from a flexi-access drawdown fund²
• Taking an uncrystallised funds pension lump sum, known as a UFPLS²
• Having been in flexible drawdown before 6 April 2015, which triggered the MPAA automatically on that date²

For someone who has not yet accessed their pension fund, the MPAA is triggered only when the first income payment is taken¹⁴. Taking a drawdown income payment for the first time brings the allowance into effect¹⁵.

What does not trigger it:

• Taking only the 25% tax-free lump sum³
• Using money in the pension to buy an annuity¹⁶
• Drawing an income from a salary-based defined benefit pension scheme¹⁷

The distinction is between tax-free cash and taxable income. A UFPLS is part tax-free and part taxable, and it is the taxable element that counts⁵. A drawdown income payment is taxable income, so it counts¹⁸.

Taking only your tax-free lump sum keeps the full allowance

The MPAA will not be triggered if only the tax-free lump sum has been taken³. This is the single most useful distinction on the page, because it means the order in which someone takes money from a pension changes what they can pay in afterwards.

You can take up to 25% of your pension as a tax-free lump sum¹⁹. You can still take 25% of your pension pot as a tax-free lump sum when using drawdown²⁰. Pension Wise sets out that later lump sums can be 25% of the amount taken, as long as the total tax-free amount is not higher than 25% of that pension and the lump sum allowance²¹.

The lump sum allowance is a separate limit from the MPAA. Depending on the type of protection held, someone could be entitled to take a tax-free lump sum of up to £450,000 rather than the standard amount²². That figure applies to people with lifetime allowance protection, and the type of protection determines the exact amount.

The practical effect is that a person can take their tax-free cash, leave the rest invested, and keep the full £60,000 annual allowance for as long as no taxable income is drawn. Once a taxable payment is taken, the £10,000 limit applies from that point.

Tax relief within the £10,000 limit

Contributions up to the MPAA still attract tax relief. The limit reduces the amount that can be contributed to money purchase pensions in any one tax year while still benefiting from relief⁵. The government's rates table lists the Money Purchase Annual Allowance at £10,000¹⁰.

Relief is given at the saver's marginal rate of income tax²³. As a basic-rate taxpayer, for every £100 saved into a pension the government adds £25 in tax relief²⁴. Higher-rate taxpayers qualify for relief at 40%, and additional-rate taxpayers at 45%²⁵. Relief is available on contributions up to 100% of annual earnings, so someone with low earnings cannot use the full £10,000 if they earn less than that²⁶.

The £10,000 ceiling applies to money purchase pensions. Someone with both money purchase and defined benefit pensions has £10,000 applying to the money purchase side, with a separate allowance for the defined benefit side²⁷. The MPAA does not affect defined benefit pensions²⁸.

If contributions exceed the MPAA but stay within the annual allowance, an annual allowance charge applies to the amount by which money purchase contributions exceeded the MPAA². That charge is the mechanism that claws back the relief.

No carry forward once the MPAA applies

Carry forward normally lets someone use unused annual allowance from the previous three tax years. It is not available once the MPAA applies. If the MPAA has been triggered, unused allowances from previous years cannot be carried forward⁴. The same rule appears across provider guidance: carry forward is not available if subject to the Money Purchase Annual Allowance²⁹.

Carry forward can never be used to increase the MPAA. Once the MPAA is triggered, carry forward can only be applied to the alternative annual allowance³¹. The alternative annual allowance is the separate figure that covers defined benefit saving, which is why carry forward still has a use for someone with a final salary pension alongside a money purchase pot.

Unused MPAA cannot be rolled into a new tax year either³². Each tax year stands alone: £10,000, no more, and nothing carried over.

For someone contributing to a SIPP, the effect is direct: carry forward cannot be used to contribute to a SIPP once the MPAA applies³³. It also cannot be used to reduce contributions that exceed the MPAA³⁴.

Where to get free help

Pension Wise is the government's free and impartial guidance service for people approaching retirement, and it covers the options for taking money from a pension, including drawdown and lump sums²¹. Citizens Advice also sets out how income drawdown works and what it involves³⁵.

For anyone weighing up whether to take taxable income, the decision has a knock-on effect on how much can be paid in afterwards. Taking advice or guidance before the first withdrawal means the allowance question can be considered alongside the income decision, rather than after it.