Once you begin withdrawing taxable money from your pension pot using pension freedoms, you may be subject to the money purchase annual allowance (MPAA). The MPAA reduces the amount that can be contributed to your money purchase pensions in any one tax-year while still benefiting from tax relief to £4,000 (compared to the standard annual allowance of £40,000 for most people). If your taxable earnings in the year are below the MPAA then tax relief on money purchase pension savings is limited to 100% of your earnings (or to £3,600 if you have no earnings).
Note: just taking your tax-free cash or using your pot to buy a guaranteed income for life (an annuity) doesn’t count as taxable income for this purpose but taking a lump sum as an Uncrystallised Fund Pension Lump Sum (UFPLS) does.
If your first taxable withdrawal is part way through the tax year, the reduced allowance only applies from this date onwards. Contributions before the first withdrawal would be measured against the standard annual allowance of 40,000. Contributions from that date to the end of the tax year would be measured at the reduced rate of £4,000 but overall contributions for this tax year will also be subject to your annual allowance. From the beginning of the next tax year, the reduced allowance (£4,000) applies for the whole tax year.
Once you become subject to the MPAA you will not be able to use unused annual allowance from previous years to contribute more than your annual allowance to a money purchase pension arrangement.
Pension providers are required to notify you when you’ve taken benefits that result in a reduced allowance, so it’s a good idea to check this with them as you are required to notify all other pension arrangements you are in that the Money Purchase Annual Allowance applies, together with the applicable date.