More than one million over-55s have been subject to the money purchase annual allowance since it came into force in 2015.
For individuals wishing to dip into their retirement pots using the pension freedom rules, tax relief is available on contributions up to £40,000 a year, but once they make a flexible withdrawal, they instead become subject to the MPAA of £4,000 a year.
According to a Freedom of Information Act request by Just Group, HM Revenue and Customs revealed that 980,000 savers took a flexible payment for the first time from their pension between April 2015 and the end of September 2018.
On average, 70,000 people each quarter have withdrawn a lump sum, meaning the total to date has potentially exceeded one million.
Just Group communications director Stephen Lowe says: “While accessing the money is easy, grasping all the future tax implications is much more difficult. We now know that more than a million people are subject to stricter rules that dramatically reduce the tax efficiencey of pensions and increase the potential for inadvertently triggering tax charges.”
The MPAA is the total input across all money purchase schemes and it covers any contributions made personally, by an employer or by any third party.
Taking a 25 per cent tax-free lump sum from a pension is not a flexible payment and the MPAA would not apply, but any subsequent withdrawal is classed as a flexible payment and triggers the tighter limits.
The current limit was reduced in 2017 to £4,000 from £10,000 originally, and retrospectively imposed tighter limits on those who had already taken flexible payments.
Lowe adds: “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 byt 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.
“It’s not just that the government is willing to move the goalposts. It’s also that many people may be blissfully unaware their situation has changed and that a tax shock lies just around the corner.”