A fifth of non-advised drawdown investors who are over age 55 and taking an income are unaware of the Money Purchase Annual Allowance (MPAA), according to new research.
Figures from Canada Life show 22 per cent of non-advised investors are unaware of the £4,000 annual contribution limit for those who have taken benefits.
The MPAA was introduced in April 2015 to prevent people using the pension freedoms to recycle money through a pension and effectively receive additional tax relief on those savings.
The MPAA restricts the amount available to save into a pension once it has been ‘flexibly accessed’, with the limit triggered for example by taking an income from drawdown. In practice this means anyone who has withdrawn either a cash lump sum or income in excess of their 25 per cent tax-free lump sum from defined contribution type pensions.
The restrictions include any payments into a pension, both made personally or via an employer. The MPAA was reduced from £10,000 to £4,000 in April 2017. The charge effectively cancels out the tax relief on contributions over the allowance at the individual’s marginal rate of income tax.
Someone who is taking an income from their drawdown portfolio but still working, earning £50,000 a year, and together with their employer paying more than 8 per cent into their pension would face a MPAA tax bill.
Canada Life technical directorAndrew Tully says:“While not everybody we surveyed will still be paying into their pension, it is nonetheless concerning that many people are unaware of the restrictions and potential tax implications if they continue to do so. The severe restrictions on the amount that can continued to be paid into a pension once benefits have been drawn are likely to catch many people out, leaving them vulnerable to large tax bills.
“Navigating the various rules around pensions and retirement can leave people exposed, especially if they have chosen a DIY retirement. Many people are taking advantage of the pension freedoms and yet have no plans to fully retire for many years, so the MPAA is likely to catch out the unwary.
“HMRC admits it isn’t collating data on this issue, and says it is incumbent on individuals to declare additional savings via the self-assessment process. This might sound sensible until you consider the many people who have flexibly accessed pensions without advice who have previously never experienced the self-assessment process and remain blissfully unaware of the problem.
“Getting professional financial advice can help you work out the best approach based on your individual circumstances, ensuring you get the most out of your hard-earned savings, rather than sending large amounts to the taxman.”