The Workings of the Money Purchase Annual Allowance (MPAA)

In this article, we discuss the Money Purchase Annual Allowance (MPAA), a restriction on pension contributions that applies once benefits have been accessed flexibly. We explore how it works, when it is triggered, and its implications for pension planning. This is useful reading as part of your preparation for the CII R04, J05, or AF7 exams.

This article is correct as at 26 March 2025.

Most with a basic knowledge of pensions will be familiar with the concept of the annual allowance.

Introduced at A-day on 6 April 2006, it limits the amount of tax-relieved savings that an individual can make into registered pension schemes in any given year. Whilst the limit had fluctuated since its introduction, it is currently set at £60,000 per annum.

However, what is not quite so widely known is the existence of an additional limit which can be imposed on scheme members who have previously accessed benefits flexibly. This is known as the Money Purchase Annual Allowance (MPAA).

When was the MPAA introduced and why?

Unlike the standard annual allowance, the MPAA has not been in existence since A-day. The concept was introduced in 2015 when the pension freedoms were brought in, allowing scheme members to access their pension benefits much more flexibly and with fewer restrictions than was previously the case. Its aim was to prevent individuals from abusing the system by drawing funds flexibly and then recycling them into their pension to benefit from a further tax-free cash entitlement.

What triggers the MPAA?

The allowance applies from the date that it is ‘triggered’, which can be via a number of flexible benefit access events. These are as follows:

• Withdrawal of funds from a flexi-access drawdown fund (including in the form of a short-term annuity)
• Taking an UFPLS
• Notifying the scheme administrator of an intention to convert a pre-6 April 2015 capped drawdown fund to a flexi-access drawdown fund and then subsequently taking a withdrawal from that fund (including in the form of a short-term annuity)
• Taking more than the permitted maximum for capped drawdown from a pre-6 April 2015 drawdown pension fund
• Receipt of a stand-alone lump sum when entitled to primary protection where the lump-sum protection was greater than £375,000 on 5 April 2006
• Receipt of a payment from a lifetime annuity where the annual rate of payment can be decreased in other than permitted circumstances
• Receipt of a scheme pension paid directly from a defined contribution arrangement where such payments are being made to fewer than eleven other members (including any dependants’ benefits being paid) at the time the first payment is made
• Payment of a similar benefit to those listed above from an overseas pension scheme that has benefited from tax relief

The allowance is triggered with effect from the date that the relevant payment is made. This means that whilst contributions made earlier in the tax year are not retrospectively penalised, from the date the allowance is triggered, the £10,000 limit applies.

Are there any exceptions?

It is important to be aware that there are some notable exceptions to the rule. Simply taking a PCLS does not count as flexible access and nor does merely designating the balance to a flexi-access drawdown contract. It is the date of the first withdrawal from that contract that the allowance is deemed to have been triggered.

Does the MPAA apply to all pension schemes?

As the name suggests, the MPAA applies only to money purchase (also known as defined contribution) schemes. It does not apply to defined benefit schemes, where the member contribution is fixed according to earnings and therefore benefit entitlement cannot be manipulated through flexible access.

Why is understanding the MPAA important?

A basic knowledge of the MPAA and its trigger events is essential for J05 and AF7 candidates. It is also usually good for a question or two in R04 sittings.

Grab the resources you need!

If you’re preparing for the next CII R04 exam and want to boost your confidence, try a free taster of Brand Financial Training’s resources. Click the link to download your R04 mock exam taster today!

Alternatively, you can download a taster for AF7 or J05 if you are preparing for either of those exams.