A study by retirement provider Just Group of HMRC data found that 260,000 people took their first flexible pension payment in 2020, bringing the total number who have been subject to the Money Purchase Annual Allowance rules to 1.6m since the rules were introduced 5 years ago.
The rules mean that once a pension income is taken from a defined contribution scheme the annual pension saving allowance is cut from £40,000 per annum to £4,000 per annum, limiting how much savers can add each year to their pension.
Just believes many pension savers do not understand that drawing down flexible pension income means they will have their ability to continue to fund their pension in future severely limited. The MPAA rules also require savers to notify any other scheme they pay into that they are subject to restrictions.
Just Group says the majority of pension savers are not using free, independent and impartial guidance to avoid pension ‘tax traps’ and it wants to see change.
Stephen Lowe, group communications director at retirement specialist Just Group, said he was concerned that too few people taking their first flexible payment had taken expert guidance .
He said: “The idea that you have the freedom to use your pension like a bank account – paying in or drawing out when you want without any knock-on consequence – is simply not how the system works.
“The first taxable withdrawal can trigger an overpayment of tax that will need to be reclaimed – the government has had to pay back more than £692 million to pension savers who have overpaid tax on flexible withdrawals since 2015.
"On top of that, the MPAA rules kick-in, slashing the amount savers can add to their defined contribution pension while still benefiting from tax relief to less than £72 a week which can cause problems for people who had planned to top-up their pension savings in the run up to retirement, perhaps when the mortgage was paid off and kids had left home.”
Mr Lowe said the current system was not working and it was vital that the FCA introduced rules to ensure that the majority of pension savers from age 50 took guidance before taking flexible pension income and risking falling into the MPAA trap.
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