The Government is pressing ahead with the retrospective cut in the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000, today’s publication of the Finance Bill has confirmed.
The £4,000 MPAA will take effect from 6th April 2017, and means around half a million pension savers who accessed their pensions under the freedoms through UFPLS on the expectation that their new MPAA would be £10,000 will now see it more than halved.
Thousands of people in workplace pensions, including those automatically enrolled into workplace schemes, could face new tax charges as a result of the retrospective change if their annual contributions now exceed £4,000.
Only those who accessed pension using UFPLS or by taking an income from flexi-access drawdown are affected, while those who took their 25 per cent tax-free lump sum are not impacted. UFPLS savers are not able to take their 25 per cent tax-free lump sum alone.
Research from provider Retirement Advantage carried out among people who have used the pension freedoms suggests 37 per cent who have accessed cash from their pensions have continued to pay into a pension, while 19 per cent say their employer has. It found 67 per cent of these people are completely unaware of the MPAA.
Retirement Advantage pensions technical director Andrew Tully says: “Our research shows a significant number of people are taking full advantage of the pension freedoms to withdraw money from a pension pot while they or their employer continue to pay in to a pension. Unfortunately, awareness levels of the MPAA among the general public is low, so it’s inevitable people are going to be caught out by this change.
“One of the key benefits of the pension freedoms was the ability to phase withdrawals to fit in with the increasingly flexible approach many people want in later life – taking sums to top up other income, or as a bridging pension until state benefits kick-in. It also allows people to access their pension pot at relatively young ages, for example 55-60, if they have a specific need, for example to pay off expensive debt or to tide people over who have been made redundant. Now the freedom to withdraw funds at earlier ages needs to be accompanied by flashing warning lights, or people may face an unexpected hefty tax charge.”