Advisers can help clients retain their saving power by drawing money from the right pension pot says former pensions minister Steve Webb.
New analysis by Royal London suggests little known tax rules mean savers could see their ability to save into a pension slashed by up to 90 per cent if they draw money from the ‘wrong’ pension pot.
One of the limits is the money purchase annual allowance that was originally set at £10,000 per year but has since been cut to £4,000 per year.
The government introduced the MPAA to stop people from repeatedly taking money out, benefiting from tax free cash, and putting money back in again with the benefit of tax relief.
More than one million over-55s have been subject to the money purchase annual allowance since it came into force in 2015.
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.
In general someone who takes money out of a defined contribution pension is affected by the MPAA if they draw money out beyond the 25 per cent tax-free lump sum.
But Webb, Royal London’s director of policy, says there is a little-known exception to this rule.
He points out those who take everything out of a small pension pot under £10,000 do not trigger the MPAA.
Webb argues an individual with two pensions who wants to withdraw less than £10,000 should consider cashing in a small pot in full, rather than taking a partial withdrawal from a larger pot, to avoid the MPAA.
They will retain the ability to put up to £40,000 into a pension each year in future, rather than having this slashed to £4,000.
Webb adds: “Last year, over half a million people aged 55 or over made flexible withdrawals from their pension, and many of these withdrawals will have been for amounts under £10,000. If they emptied out a small pot then this will have had no impact on their future ability to save into a pension.
“But if, by mistake, they took the same amount as a partial withdrawal from a bigger pot, they risk triggering stringent HMRC limits on future pension saving.
“Those with more than one pension pot should consider very carefully the order in which they access these funds, especially if they may want to contribute into a pension in future.”