Ignorance of MPAA leading to unexpected tax bills
17 January 2019
Over one in five drawdown customers are unaware there is an annual limit to the amount that can be paid into their pension once it has been ‘flexibly accessed’, putting them at risk of large unexpected tax bills, according to Canada Life.
In a survey* the life and pension provider found that 22% of non-advised over 55s were unaware of the Money Purchase Annual Allowance (MPAA), which was introduced in April 2015 to prevent people using the pension freedoms to recycle money through a pension. It was reduced from £10,000 to £4,000 in April 2017, effectively cancelling out the tax relief on contributions over the allowance at the individual’s marginal rate of income tax.
Andrew Tully, technical director, Canada Life, described the lack of awareness as “concerning”.
He commented: “The severe restrictions on the amount that can be 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.”
Tully said with many people taking advantage of the pension freedoms with no plans to fully retire for many years, the MPAA is “likely to catch out the unwary.”
He added: “HMRC 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.”
*The survey was conducted amongst 500 respondents aged 55+ with income drawdown investments.
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