Twenty-two per cent of non-advised drawdown consumers are unaware of the Money Purchase Annual Allowance (MPAA), with Canada Life warning that savers could be faced with unexpected tax bills.
The MPAA applies to savers that have already begun drawing down their pension, limiting the amount they can continue saving into their pension before being taxed to £4,000 a year. In practice, this means anyone who has withdrawn either a cash lump sum or income in excess of their 25 per cent tax-free lump sum from defined contribution type pensions. Introduced in April 2015, originally set at £10,000, it was reduced to £4,000 in April 2017.
Canada Life technical director, Andrew Tully, noted that while not everybody 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 continue 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,” he said.
Brooks added that HMRC has said it is not collating data on the issue, and that 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,” Brooks stated.
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