Drawdown clients unaware of money purchase limits

Drawdown clients unaware of money purchase limits

One in five non-advised drawdown clients are unaware of the money purchase annual allowance (MPAA), putting them at risk of facing unnecessary tax bills, Canada Life has warned.

The insurer questioned 500 people over the age of 55 with income drawdown investments last November and found that 22 per cent did not know about the annual limit to the amount they can pay into a pension and receive tax relief on once benefits have been drawn.

The MPAA was introduced in 2015 to prevent people using the pension freedoms to recycle money through a pension and receive additional tax relief on those savings. 

Once a pension has been accessed the MPAA restricts the amount available to save before a tax charge is payable, including any payments made by individuals or via an employer. 

In April 2017 the MPAA was reduced from £10,000 to £4,000. But as FTAdviser reported in September, the government is not able to evaluate the effectiveness of the cuts because HMRC does not have the data on how much tax is collected through this allowance.

Andrew Tully, Canada Life technical director, said someone who is taking an income from their drawdown portfolio but is still working and earning £50,000 a year, and who together with their employer pays more than 8 per cent into their pension, would face an MPAA tax bill.

He said: "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."

Mr Tully added: "HMRC admits it isn’t collating data on this issue, and says 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.

"Getting professional financial advice can help you work out the best approach based on your individual circumstances, ensuring you get the most out of your hard-earned savings, rather than sending large amounts to the taxman."

Fiona Tait, technical director at Intelligent Pensions, said: "The MPAA goes against the whole concept of pension freedom, which allows people to retire flexibly.

"More and more people want to retire gradually rather than going straight from full time work to no work at all. They therefore need to access some of their pension to make up the shortfall in their income, but as they still have earnings they could still save to enhance their eventual retirement. 

"The MPAA puts a restriction on saving just when it has become more relevant and, possibly more affordable."