Pension warning as simple error may mean you slash savings potential by 90%

Pensions and savings: Interactive Investor expert gives her advice

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

Pension saving is often considered key to securing the retirement of one’s dreams. For some, putting into a pension to ensure this sum snowballs over time will be a key goal.

However, this needs to be managed carefully due to vital savings rules when it comes to pensions.

When people start to take money from their defined contribution pension pot, the amount they can still contribute while getting tax relief might reduce.

This is known as the Money Purchase Annual Allowance (MPAA), a vital pension rule.

Most people will be able to contribute up to £40,000 into their pension pot each tax year, while still receiving tax relief.

MoneyHelper, the Government-backed website, explains this includes contributions from an employer.

However, if the MPAA is triggered, then savings potential can dwindle to a cap of £4,000 – reducing savings potential by 90 percent.

The website explained key circumstances where the MPAA might be breached, including:

  • If a person takes their entire pension pot as a lump sum or starts to take lump sums from a pension
  • Moving a pension pot money into flexi-access drawdown and taking an income
  • Buying an investment-linked or flexible annuity where income could go down

DON’T MISS
Pensioner, 77, explains what £3,000 boost to pension means to her [EXCLUSIVE]
Santander issues urgent scam warning as woman loses £849 [WARNING]
Bad news for Britons as £500 state pension uplift rejected [LATEST]

Adrian Lowery, personal finance expert at BestInvest, said: “Those planning to access their pension flexibly either this tax year or next, need to think carefully about both the tax impact and the effect it will have on their ability to save further amounts into pensions in the future.   

“Anyone who makes a flexible withdrawal from their retirement pot beyond the 25 per cent tax-free lump sum triggers the ‘money purchase annual allowance’. 

“This permanently slashes their annual allowance from £40,000 to just £4,000.

“It revokes the privilege to carry forward unused allowances from previous tax years.  

“This measure was introduced to stop people recycling money through pensions to benefit from extra tax-free cash.”

Pension freedoms rules introduced in 2015 mean people have much greater flexibility when it comes to saving.

Britons are no longer forced into buying an annuity – which serves as a guaranteed income for life for over 55s.

Instead, they could stay in drawdown, which allows their pension to continue to be invested.

What is happening where you live? Find out by adding your postcode or visit InYourArea

But they should bear in mind the MPAA as well as other rules if they do choose this option.

Those worried about their pension choices can contact PensionWise.

The free and impartial service offers guidance about defined contribution pension options.

Alternatively, some may also wish to seek their own financial advisor before making pension-related decisions. 

Source: Read Full Article