Those approaching or in retirement could be faced with unexpected tax bills due to low levels of awareness of the Money Purchase Annual Allowance (MPAA), with 22% of consumers unaware of the annual limit you can pay into your pension after drawdown, according to new research by life and pensions provider, Canada Life.
Currently you (and others on your behalf, such as your employer) can pay up to £40,000 a year in total into a pension scheme before suffering a tax charge*. This is known as your Annual Allowance. However, if you start to take money flexibly from a defined contribution (money purchase) pension, the amount you (and others on your behalf) can pay into a money purchase pension without suffering a tax charge reduces. This is known as the Money Purchase Annual Allowance (MPAA). The MPAA in the current tax year (2018 / 19) is £4,000.
* As well as the annual allowance limit, personal contributions to pensions are only tax-relievable up to 100% of your earnings.
Canada Life’s technical director Andrew Tully said “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 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.”
Tully highlighted that “navigating” the various rules around pensions and retirement can leave consumers exposed, particularly 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.
HM Revenue & Customs has said that it is not collating data on this issue and that it is relying on people to declare additional savings via the self-assessment process. The problem here however is that many people who have flexibly accessed pensions without advice may not have experienced the self-assessment process and will remain “blissfully unaware” of the situation.
At Brunsdon we specialise in wealth management, retirement planning and drawdown and recommend you speak to a Brunsdon Financial Adviser to discuss the best approach based on your individual circumstances.
This article is for information only and does not constitute advice. It is based on our current understanding of HMRC practice and tax law which may be subject to change. Investments can fall as well as rise, irrespective of the level of risk chosen, and the value of an investment and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested. Any information provided in this presentation regarding tax treatment or legislation is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs practice (January 2019), all of which may be subject to change. Brunsdon is not responsible for the content of third party web sites.