What the money purchase annual allowance is and what triggers it

The money purchase annual allowance is a lower limit on how much you can pay into a defined contribution pension each year before a tax charge applies. It applies only after you start taking money from your pension pot in certain flexible ways.

What the money purchase annual allowance is

This allowance caps the amount you can save into your pension without facing a tax charge. From the 2023 to 2024 tax year onwards, the money purchase annual allowance is £10,000.

The limit exists to stop people claiming tax relief twice. When you pay into a pension, the government adds tax relief to boost your savings. Without a firm rule, someone could withdraw cash from their pension, pay it straight back in, and receive a second round of tax relief on the same money. The rule blocks this cycle, known as pension recycling.

The £10,000 cap covers all contributions across any money purchase pensions you hold. Money purchase pensions are also known as defined contribution pensions. The total limit counts the money you pay in, the money your employer pays in on your behalf, and the basic rate tax relief added by the government.

From the 2017 to 2018 tax year to the 2022 to 2023 tax year, the limit was £4,000. Going over the allowance means you pay a tax charge on the excess, which effectively cancels out the tax relief you received for paying the money in.

How the limit differs from the standard annual allowance

Most people build their retirement pots under the standard annual allowance. From the 2023 to 2024 tax year onwards, the standard annual allowance is £60,000 for people the money purchase and tapered rules do not affect.

Contributions from you and your employer can run right up to that £60,000 ceiling before a tax charge applies. However, once the money purchase rules trigger, the ceiling for money purchase pension savings drops to £10,000.

The drop is permanent. You cannot switch back to the £60,000 standard allowance later, even if you stop taking money from your pension. The lower limit stays with you for all future tax years.

The money purchase rules only apply to defined contribution pensions, where your pot size depends on what you pay in and how the investments perform. They do not cover defined benefit pensions. A defined benefit scheme pays a guaranteed income based on your final salary or your career average earnings, and falls under different tax calculations.

Ways of taking pension money that trigger the lower allowance

You only face the £10,000 limit if you access your pension in specific, flexible ways. The rules refer to this as flexibly accessing your pension benefits.

Taking cash or a short term annuity from a flexi access drawdown fund, or cash from a pension pot as an uncrystallised funds pension lump sum, may lower your annual allowance. Drawdown allows you to leave your pension pot invested while taking income directly from it. You can draw down as much or as little as you want. The moment you take your first taxable income payment from a flexi access drawdown fund, the money purchase rules apply to you.

An uncrystallised funds pension lump sum is a long name for a simple action. It happens when you withdraw a single lump sum directly from your untouched pension pot. You can usually take up to 25% of this lump sum tax free, and the rest is taxed as income.

Your pension provider will tell you if your withdrawal triggers the money purchase annual allowance. They should send a statement saying so, and the rules generally expect the saver to pass this on, which means telling any other pension schemes they still pay into that the lower limit now applies to your contributions.

Ways of taking pension money that do not trigger the rule

Some ways of taking pension money do not trigger the money purchase annual allowance. Several types of withdrawal leave your allowance exactly as it is, so cash can be taken while saving continues under the usual allowance.

You can usually take up to 25% of a pension as a tax free lump sum, up to £268,275 in total. Taking this tax free cash on its own does not trigger the money purchase rules. The lifetime allowance was abolished on 6 April 2024.

HMRC rules confirm that a pension commencement lump sum, a small lump sum and a trivial commutation lump sum do not trigger the money purchase annual allowance. These terms cover several ways people take small amounts of cash or start their retirement.

A pension commencement lump sum is the official term for taking your tax free cash before moving the rest of your pot into drawdown or buying an annuity. A small lump sum lets someone take a whole pension pot worth £10,000 or less as cash, within set limits, without it counting as flexible access. A trivial commutation lump sum usually applies when someone cashes in a small defined benefit pension.

Buying a lifetime annuity that cannot decrease, except in prescribed circumstances, does not trigger the money purchase annual allowance. A lifetime annuity gives you a guaranteed regular income for the rest of your life. Because you hand over your pension pot in exchange for an income that cannot normally fall, the tax rules do not view this as accessing the money flexibly.

Why the rule matters to people still paying into a pension

Some people start taking money from their pension while they are still working. You might want to clear a mortgage, help a family member, or simply drop your working hours and top up your wages with pension income. For anyone who keeps saving into a workplace pension after that, the £10,000 limit matters.

A £10,000 limit might sound like plenty of room, but regular employer contributions can eat into it. Generous workplace payments can use up a large part of your allowance before you even make your own contributions. Exceeding the allowance results in a tax charge that you must declare on a self-assessment tax return.

Knowing the triggers in advance can help people avoid unexpected tax bills. Understanding the triggers allows you to start saving money efficiently right up until you retire. Which kind of withdrawal suits any one person is a question for Pension Wise guidance or a regulated financial adviser.

A household budget can show how much cash is really needed before any pension money is touched. Building a clear picture of your regular expenses and what your disposable income is will guide your choices. Setting up a budgeting spreadsheet you will keep using can show the size of a cash flow gap, though any flexible withdrawal, however small, can still trigger the lower allowance.

Where to get free guidance and regulated advice

Pension rules are complex, and making a mistake can carry heavy tax penalties. Nobody has to work out the right path alone before filling in withdrawal forms.

Pension Wise gives free and impartial government guidance to people aged 50 and over with a defined contribution pension. Appointments are booked through the MoneyHelper website. The service helps you understand the tax implications of different withdrawals and how the allowance rules work.

A Pension Wise appointment explains the facts, but the service cannot tell you what to do with your own money. For personal recommendations, you will need a regulated financial adviser. An adviser looks at your whole financial situation and recommends which steps suit that situation.

Regulated advice usually involves a fee. Advisers take responsibility for the advice they give, meaning you have a clear route for complaints if things go wrong.