Around 1,200 pension savers in the UK are tapping into their retirement pots for the first time every working day triggering Money Purchase Annual Allowance (MPAA) restrictions, data from HM Revenue & Customs (HMRC) shows.
The MPAA significantly reduces the sum people can contribute towards a pension every year.
Savers can put up to £40,000 ($46,433, €46,600) into their pots without paying tax each year, but once they access their pension and start withdrawing above the tax-free 25%, the sum dramatically drops to £4,000.
Analysis by retirement firm Just Group revealed that, in the first six months of 2022, around 148,000 savers took their first flexible payment from a pension.
Worryingly, far too many are doing so without seeking independent financial advice firm, the company found.
Stephen Lowe, group communications director at Just Group, is concerned that many people may be accessing their pots without fully understanding the implications under pension freedoms rules.
“More than two million pension savers aged over 55 are now subject to the MPAA rules and current figures suggest that is growing by nearly 1,200 each working day,” he said. “Once triggered, the rules apply for life – you can’t go back – so it is important people understand the consequences.”
Each working week, around 6,000 Brits are triggering MPAA restrictions, according to Just Group analysis.
Lowe explained that contributing £4,000 a year, after triggering the MPAA, is equal to a maximum employee contribution of £187 a month for basic rate taxpayers, whose employer is contributing £100 a month in a company scheme.
“This may sound a lot but is a relatively modest sum where people are trying to build up a pot quickly, which is typical for those in the last few years before retirement or if they have dipped into their pension to help them through a tough spot due to the pandemic or cost of living crisis,” he said.
“If people are thinking of making a pension withdrawal and wondering if they’ll become subject to MPAA rules, then the answer is that it depends.
“Taking tax-free cash doesn’t trigger the MPAA rules but any amount above this does. Buying guaranteed lifetime income isn’t a trigger but withdrawing funds designated to drawdown is. Full withdrawals may or may not trigger the MPAA depending on the size of the pot being taken. And the MPAA limits only apply to defined contribution saving, which means most private sector employees and self-employed pension savers will be at risk.
“It’s a veritable web of dos and don’ts, topped off by the fact there are financial penalties for getting it wrong – for example a fine of £300 plus £60 a day for failing to notify other schemes within 91 days that a first flexible payment has been taken.”
Considering the complexities and hurdles pension savers must navigate, Lowe believes that boosting the usage of Pension Wise guidance and encouraging people to seek financial advice would give people more confidence with their pension decisions as well as help them avoid scams and paying more tax than they should.
“The government has said it wants taking guidance to become ‘the norm’ but currently it is not reaching enough people, suggesting a more robust intervention – such as auto-enrolling people into guidance sessions – is required,” he added.
“MPs on the Work & Pensions Select Committee recently reiterated their call for an evaluation trial to test the effect of auto-booking people into Pension Wise appointments.
“The government has so far ignored these calls despite the fact we know thousands are making complex financial decisions every week without support. Hopefully the new pensions minister will be more interested in finding solutions to this problem.”