Pensioners suffering cashflow issues as a result of the Coronavirus crisis should think twice about tapping into their pension or risk being hit with a tax charge, warns Quilter.
The introduction of pension freedoms in 2015 has allowed those aged 55 and over the flexibility to access their pensions when needed, but short-term withdrawals could trigger the Money Purchase Annual Allowance (MPAA), which would severely limit the contribution savers could make going forward.
The MPAA restricts subsequent pension contributions after withdrawal to just £4,000 a year.
The wealth management group said that the quirk in the tax system means pension savers “need to be careful” how they use their savings during this period of uncertainty.
Ian Browne, retirement expert, Quilter, said: “The MPAA is an absurd tax which jars terribly with pension freedoms. One would think that the current environment is exactly the right time to make use of the flexibility that freedoms has introduced. However, thanks to this quirk within the tax system they need to be careful how they tap into the money that is rightly theirs.
“The Association of British Insurers has warned that those aged 55 and over need to be very cautious about utilizing pension freedoms in this time. Many of this group will be tempted as research from Populus for Quilter has shown that one in four 55-64s are worried about their long term family finances and one in five are worried about their finances in the short term.”
Browne added: “There are ways to access your pension without triggering the MPAA such as small pots. However, it is not for everyone and in fact tapping into your pension may not be the best choice, so it is vital to seek professional financial advice.”