More than a million individuals over the age of 55 have been caught by tax restrictions after accessing their pensions, according to new research.
In a freedom of information (FOI) request from Just Group, HM Revenue & Customs (HMRC) revealed that 980,000 individuals took a flexible payment for the first time from their pension between April 2015 and the end of September 2018.
This means at an average of 70,000 people each quarter, the total to date will exceed one million, Just stated.
Tax relief is normally given on pension contributions of up to £40,000 a year but once a saver withdraws from their pension, they become subject to the Money Purchase Annual Allowance (MPAA), currently set at £4,000 a year.
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 further savings.
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.
Stephen Lowe, group communications director at Just Group, said grasping the future tax implication of accessing pensions flexibly could prove difficult for people and many may not be aware of the allowance change.
According to recent research from Canada Life, one in five non-advised drawdown clients were unaware of this allowance.
He said: "We now know that more than a million people are subject to stricter rules that dramatically reduce the tax efficiency of pensions and increase the potential for inadvertently triggering tax charges.
"Many people dipping into pension money fully expect to continue making contributions for years to come.
"Let’s be clear, it’s not the super-rich who are going to get caught out but perhaps someone on a reasonable salary who gets a good promotion, a self-employed person or director who has a profitable year, or someone who missed a few years of contributions and wants to catch up.
"The complexity of the MPAA is one reason why we are cheerleaders of the free, independent and impartial guidance on offer from Pension Wise to all those thinking of taking pension cash and encourage people to take regulated financial advice.
"These decisions cannot be undone so it’s important to get them right."