Pension Dipping: Allowance Dripping
During 2020 a significant proportion of over-55’s stymied their annual allowance which represents the amount individuals can invest in their pensions whilst still receiving tax relief. Usually, employees investing in a pension are permitted to withdraw from their defined contribution pension up to a 25% tax-free limit. Breaching this limit has meant individuals effectively cut their annual tax-free allowance in terms of investments in pensions from £40,000 to £4,000.
The allowance is termed as the Money Purchase Annual Allowance (MPAA) and once it has been breached, individuals who continue working with the mindset of building up their retirement kitty are more likely than not to realise the unintentional ramifications of their actions later on when the tax bill materializes. Means by which to remain circumscribed within the tax-free limit could include having to forgo contributions form one’s employer which would be a severe blow since that represents are significant amount of savings which would’ve been paid by the employer being lost for the year.
Individuals need to be made more aware of the tax implications if they choose to withdraw from the pension jar
Whilst pension providers have the onus on their shoulders to sound the alarm bells when savers come close to breaching their usual MPAA and materializing the reduction from £40k to £4k, the deluge of rule changes encompassing pensions in recent years hasn’t helped savers’ cause in keeping an eye on any communications delivered by pension providers. The unforeseen pace and onset of the impact of the pandemic in early 2020 also meant many individuals were facing the very real risk of unemployment and thus withdrew from their pensions to carry them through the anticipated rough patch.
This has led to criticism of the Financial Conduct Authority (hereon termed as the FCA) for the lack of information being made available to the general public, in particular the elderly who are close to retirement age but haven’t yet made the decision to do so. In response the FCA has advised individuals to take advantage of the services offered by Pension Wise. There has been additional emphasis placed on making this information available and comprehendible to those aged 50 or over.
For the latest tax advice and accounting support, call or book a meeting with Cheylesmore Accountants to steer clear of fines and penalties whilst having a forward-looking team of accountants handle all your business affairs promptly and in an efficient manner. This allows you to focus more on what matters more to you, whether that is developing your business or achieving a better work-life balance.
