Quilter is urging pensioners with cashflow issues because of the current lockdown to think carefully about how they withdraw money from their pension and avoid triggering a tax event.
Pension freedoms mean those aged 55 and over have flexibility to access their pensions when they need it, but short- term withdrawals need to be considered carefully as triggering the Money Purchase Annual Allowance (MPAA) will severely limit the contribution you can make in the future.
The MPAA restricts subsequent pension contributions after withdrawal to just £4,000 a year.
However, if you take money out of a small pension pot of under £10,000 you do not trigger the MPAA. Some providers have designed their pension products to facilitate this exemption. For example, Old Mutual Wealth, Quilter’s UK platform, has an option that allows advisers to create up to three small pots from one big pot.
Ian Browne, retirement expert at Quilter:
“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.
“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.”