UK: Unbeknown Tax Restriction To Affect UK Savers Accessing Pensions
More and more UK savers are accessing their pensions ahead of retirement. Whether it be in their entirety, partial withdrawals or irregular contributions in line with pension freedoms, a new financial flexibility abounds the pensions industry. Appealing from the offset, tax loopholes and restrictions form a prevailing reality for many unsuspecting individuals, particularly when undertaken without professional advice.
Recent research has revealed some estimated one-million savers over the age of 55 may be subject to shock tax restrictions when accessing their pensions. Conducted by Just Group, data received from a freedom of information (FOI) request to HM Revenue & Customs (HMRC) details between April 2015 and September 2018, 980,000 individuals proceeded with a first-time flexible pension withdrawal. With figures based on an average of 70,000 people per quarter, the total to date is likely to exceed one million.
The tax restriction in question is represented by the Money Purchase Annual Allowance (MPAA) – a rule an individual is immediately subject to once they withdraw from their pension. The threshold is currently set at £4,000 per year. Introduced in 2015, the MPAA aims to hinder savers exploiting pensions to launder money and subsequently receive additional tax relief on further savings. This MPAA will only apply in the event that a Flexi Access Drawdown (FAD) starts. Another instance may be when an Uncrystallised Fund Pension Lump Sum (UFPLS), withdrawn for the MPAA, is not triggered with the 25% pension commencement lump sum. In reality, less than 10,000 people are likely to trigger the MPAA per annum when still in employment. Very few are also able to make pension contributions of more than £4,000 per annum.
A relatively recent initiative itself, the MPAA was dramatically reduced from £10,000 to its current £4,000 value in April 2017. The allowance change is set to bring even further surprise with the initiative itself considered unfamiliar amongst the general public and their understanding of pension accessibility and contributions. Recent research from Canada Life approximates one in five non-advised clients in drawdown were not aware of the change.
“I expect those that triggered the MPAA either had immediate needs to receive funds, with no other solution than to withdraw from their pension funds. Or, where they may perhaps withdraw from other sources, such as a bank loan, they may not be familiar with all conditions surrounding the MPAA”, comments Geraint Davies, Montfort’s founder.
“In either case, an individual will generally benefit more with the engagement of a professional financial planner to manage their financial position with the aim to ensure the individual needn’t unexpectedly access funds not covered from any contingency pot. Where they may be a requirement to proceed with a pension withdrawal, this should always be approached with tax efficiency,” further comments Geraint.
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