Tak­ing tax­able income from your pen­sion could reduce your future pen­sion con­tri­bu­tion lim­it from £60,000 to £10,000.

If you’re approach­ing retire­ment, it’s impor­tant to under­stand what hap­pens when you start tak­ing mon­ey from your pen­sion.

You can usu­al­ly take 25% of a defined con­tri­bu­tion pen­sion tax-free, while leav­ing the rest invest­ed.

But there’s an impor­tant dis­tinc­tion:

Tak­ing your tax-free lump sum on its own does not trig­ger the Mon­ey Pur­chase Annu­al Allowance (MPAA).
Tak­ing tax­able income from your pen­sion gen­er­al­ly does.

Once the MPAA is trig­gered, the amount you can con­tribute to mon­ey pur­chase pen­sions each tax year can fall from £60,000 to £10,000.

And impor­tant­ly, once trig­gered, the MPAA can­not be reversed.
This can be par­tic­u­lar­ly rel­e­vant if you:
• Are still work­ing but have start­ed draw­ing your pen­sion
• Want to con­tin­ue mak­ing sig­nif­i­cant pen­sion con­tri­bu­tions
• Are a busi­ness own­er plan­ning to make employ­er pen­sion con­tri­bu­tions
• Are con­sid­er­ing tak­ing an income from your pen­sion while con­tin­u­ing to work

The inter­ac­tion between pen­sion with­drawals, Net Rel­e­vant Earn­ings and the annu­al allowance can be com­pli­cat­ed.

The tim­ing of tak­ing pen­sion ben­e­fits can there­fore be just as impor­tant as the amount you take.

If you’re con­sid­er­ing access­ing your pen­sion while con­tin­u­ing to work or con­tribute, make sure you under­stand the tax impli­ca­tions before tak­ing tax­able income.