Beware the MPAA pension trap

For most of us, our pension becomes available at the age of 55 (rising to 57 by 2028), even if we plan to continue working. This provides the flexibility to earn an income whilst also drawing a pension.

However, many are unaware that if you do so you may trigger the Money Purchase Annual Allowance (MPAA) which can restrict the amount that you can then contribute, tax efficiently, into your pension over the rest of your career.

The decisions you make could affect your income for the rest of your life, so it is important to have a plan in place before accessing your pension for the first time.

Making the best choices

When planning your retirement there are lots of rules and regulations to consider, and a lot of information to collate.

Some of the things you need to consider include how you’ll access your pension, your tax liability, and, for those who have multiple pensions, which ones to use first.

If you make the wrong choices, there is a risk that you may trigger the MPAA, which could limit how much you can then contribute to your pensions with the benefit of tax relief, thus reducing your final pension amount.

What is the MPAA?

In most cases, you can contribute 100% of your annual earnings, up to a maximum of £60,000, to your pension each tax year*. This is known as your Annual Allowance (AA). You will receive tax relief on these contributions at the highest level of Income Tax that you pay. As a result, your pension receives an instant boost and makes saving for retirement more effective.

However, depending on how you access your pension, you may trigger the MPAA, which reduces the amount that you can then save into your pension tax efficiently each year to just £10,000.

The rules surrounding the MPAA are complex, but the main scenarios which will trigger it include withdrawing your entire pension, putting your pension money into a Flexi-Access Drawdown scheme and starting to take a flexible income, or purchasing an Annuity.

You can usually take a 25% tax-free lump sum from your pension without triggering the MPAA, depending on the rules of the pension scheme, but it is also important that you understand the impact of this decision. Taking a lump sum early in retirement, or even before you retire, can have a significant affect on the income your pension will deliver.

*Under the Tapered Annual Allowance rules, if your ‘adjusted income’ (ie your annual income before tax plus the value of your own and any employer pension contributions) is more than £260,000 per annum, your AA may be reduced by £1 for every £2 that your adjusted income exceeds £260,000.

Why does the MPAA matter?

If you decide to access your pension at 55 but don’t plan to retire for another decade, the MPAA could significantly reduce the amount that you are able to contribute tax-efficiently to your pension over the next ten years. Ultimately your pension pot could be far lower than expected, particularly when you factor in investment growth.

You will likely have spent your career saving into a pension with the aim of creating an income that will deliver a retirement lifestyle that you can look forward to. But taking too much too soon, or being unaware of tax traps, could mean that the retirement you have worked so hard for doesn’t meet your expectations.

Always consider the full impact of your decisions on your long-term retirement plans before you access your pensions, and look at all of the alternatives before taking any action that you may later regret.

If you are unsure of the best course of action in your own particular circumstances, it may be worth seeking advice from a regulated financial professional to ensure that the decisions you are making are the right ones for you.

If you would like to discuss this, or any aspect of financial advice with one of our Wealth Planners, please email us at hello@successionwealth.co.uk or call us on 0800 051 4659 and we will arrange for someone in your area to contact you.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

FP-2025-173 – last reviewed March 2025