Over-55s unaware of money purchase annual allowance

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Over-55s unaware of money purchase annual allowance

The majority of people who have accessed their taxable pension while still working are "completely unaware" of the money purchase annual allowance, research by Retirement Advantage has found.

The findings appeared to confirm fears expressed by critics of the money purchase annual allowance (MPAA) that the rule would catch many people unaware, hurting people who believe they are legitimately using pension freedoms.

The MPAA, introduced in April 2015 to coincide with pension freedoms, imposes a £10,000 a year annual allowance on over-55s who have drawn down on the taxable portion of their pension.

The limit will go down to £4,000 in the new tax year, which starts next week.

Retirement Advantage surveyed 250 people over the age of 55 who had flexibly accessed their pension.

It found that 37 per cent had continued to work after having accessed their taxable pension.

Of those, 67 per cent were unaware that accessing their taxable pension had permanently triggered the MPAA.

Taking money out of a tax efficient pension to simply reinvest or put in a savings account, having paid tax on some or all of it, is a little mad.Andrew Tully

Andrew Tully, pensions technical director at Retirement Advantage, said the MPAA was "likely to catch many out" when the limit falls to £4,000 a year.

The research also revealed home improvements were the most common use of cashed-in pension savings, with 28 per cent of respondent using the money for that purpose.

Holidays and car purchases were also popular uses of the money - more so than paying off debts.

But the second most common use of pension money was to put it in a savings account, with 26 per cent of respondents saying they had done that.

Nineteen per cent, meanwhile, withdrew the money only to reinvest it outside their pension.

"I doubt many Lamborghinis have been bought with the cash," said Mr Tully, "but taking money out of a tax efficient pension to simply reinvest or put in a savings account, having paid tax on some or all of it, is a little mad."

He went on: "Pension freedoms are clearly proving popular with retirees, but there are pitfalls for the unwary.

"With freedom and choice comes added complexity and a picture is emerging of fewer people receiving advice, government coffers benefitting from the extra tax take, and people continuing to fall victim to scams."

The research comes after HM Treasury revealed, in this month's Budget, that the tax take from pension freedoms was far greater than early projections anticipated - raising £1.5bn in 2015 to 2016, rather than the projected £0.3bn.

"This is a tax bonanza for the Treasury and, although a welcome boost to government coffers, will have been a nasty surprise for many people taking advantage of the new freedoms," Mr Tully said. 

"Paying tax on withdrawals was predicted to act as a natural brake on retirees withdrawing too much too soon, but this clearly hasn’t been the case."

The government introduced the MPAA to stop people recycling pension tax relief. However, as FTAdviser reported yesterday (30 March), the government had no evidence that this practice was actually taking place.

Richard Parkin, head of pensions policy at Fidelity International, said the government's decision to push ahead with the policy was "galling".

"Given the industry is united in its opposition to the change, and is willing to put forward alternatives, it's really disappointing that they've ignored us.

"It's particularly frustrating that they don't have any evidence of the loophole being used," he said.

He said the new rule would have the greatest impact on people on medium incomes with a good workplace pension, who inadvertently drawdown on another pension, unaware that this will trigger the MPAA.

james.fernyhough@ft.com