Why the first flexible pension withdrawal can shrink what you pay in afterwards

Most people can pay up to £60,000 a year into pensions with tax relief. Take taxable money flexibly from a pension pot, and the limit for future saving into pots of that kind can fall to £10,000.

Plenty of people now draw on a pension while still working. An old pot from a previous employer might pay for a new kitchen or bridge a gap between jobs, while contributions carry on into a current workplace scheme. That combination is perfectly allowed. It does, however, bring a rule into play that many savers only come across when a pension provider’s letter mentions it: the Money Purchase Annual Allowance, usually shortened to MPAA.

Two yearly limits

The annual allowance is the most that can be paid into pensions in a tax year with tax relief before an extra charge applies. For 2026/27 it is £60,000, and the Budget 2026 rates table confirms the same figure for 2027/28. It covers contributions from you and from your employer.

The MPAA is a second, lower limit that applies only to money purchase pensions, also called defined contribution pensions: the kind where you build up a pot. Since 6 April 2023 it has been £10,000. Between 2017/18 and 2022/23 it was £4,000. Once it applies to you, it applies every tax year from then on.

What switches the lower limit on

The MPAA is triggered when you first take money from a pension pot in a flexible way. HMRC’s Pensions Tax Manual lists the main triggers:

• taking income from a flexi-access drawdown fund, or buying a short-term annuity with it;
• taking an uncrystallised funds pension lump sum, often shortened to UFPLS, where each withdrawal is part tax-free and part taxable;
• a payment from capped drawdown that goes above the cap;
• a lifetime annuity whose payments can go down;
• a scheme pension from a money purchase scheme with fewer than 11 other pensioners.

The common thread is that taxable money has been taken from a pot in a way that leaves the rest open for further withdrawals.

What leaves it switched off

Several common ways of using a pension do not trigger the MPAA:

• taking only the tax-free lump sum, for example moving a pot into drawdown and drawing the tax-free cash but no income;
• small pot lump sums and trivial commutation lump sums;
• buying a lifetime annuity whose payments cannot go down;
• capped drawdown within its limit;
• payments from a drawdown fund inherited from someone else.

Drawing a defined benefit (final salary or career average) pension does not trigger it either, and the State Pension has nothing to do with it.

Taking tax-free cash on its own does not trigger the MPAA. Taking the first taxable pound flexibly does.

A worked example

Consider someone who takes a single UFPLS from an old pot in one tax year. In the following tax year they are still employed, and contributions from them and their employer into their current workplace pot add up to £14,000.

Without the MPAA the same £14,000 would sit well within the £60,000 annual allowance. The charge on the excess is worked out through the individual’s own tax position; the example does not calculate it.

If the same person had taken only the tax-free cash from the old pot, the £14,000 would have been tested against the normal £60,000 limit and there would be nothing to report.

The paperwork that follows

Two deadlines apply once the MPAA has been triggered. The pension scheme that paid the money must send you a flexible access statement within 31 days of the event. You then have 91 days to tell every other money purchase scheme you are still paying into, so that they know the lower limit applies.

The statement is worth keeping with other pension papers. It records the date the MPAA started, which a future provider or adviser may ask about years later.

Defined benefit pensions, carry forward and the taper

Three further points round out the picture.

Defined benefit saving

Savings into a defined benefit scheme are not tested against the MPAA. Instead, GOV.UK guidance describes an alternative annual allowance of £50,000 for that saving, which is the £60,000 annual allowance less the £10,000 MPAA.

No carry forward

Normally, unused annual allowance from the previous three tax years can be carried forward. Unused MPAA cannot be carried forward, so a quiet year does not create extra room for money purchase saving the next year.

The tapered annual allowance

People with threshold income over £200,000 and adjusted income over £260,000 have their annual allowance reduced by £1 for every £2 above the limit, down to a minimum of £10,000.

Who this matters for, and what to check

The MPAA mostly affects people who take taxable money from a pension while still working or planning to save more, including those who restart saving after a break or join a new employer’s scheme. It is less relevant to someone who has stopped paying into pensions altogether. Points worth checking before a first flexible withdrawal:

• Whether the withdrawal you have in mind triggers the MPAA or is tax-free cash only.
• How much you and your employer pay into money purchase pots each year, including any salary sacrifice contributions.
• How the taxable part of a withdrawal will be taxed through your tax code; our guide to tax codes on a second job or pension explains why first payments can look odd.
• Whether any firm offering paid help with pension withdrawals is authorised, using the FCA Register.

MoneyHelper offers free, impartial pensions guidance, and the pension provider can confirm whether a particular payment triggers the MPAA.

The short version

Taking taxable money flexibly from a pension pot, through drawdown income or a UFPLS, switches on the Money Purchase Annual Allowance of £10,000. From then on, contributions to money purchase pensions above that level each tax year face an annual allowance charge, and unused MPAA cannot be carried forward. Taking only tax-free cash, small pots, a lifetime annuity that cannot fall or a defined benefit pension leaves the normal £60,000 limit in place.