Risking shock bills and fines: Recent research found one in four over-55s dipping into pension pots are still making contributions
Savers risk a £300 fine and further daily penalties if they dip into an old retirement pot and fail to tell their current pension provider – but it is unknown how many are falling into this obscure trap.
Ex-Pensions Minister Steve Webb, who is trying to raise awareness of the penalty for not keeping your present scheme updated, made an unsuccessful attempt to find out how many people HMRC has fined since 2015.
Other dangers of tapping old pots while still making ongoing contributions have been flagged by many financial experts.
Savers who access any amount over and above their 25 per cent tax free lump sum are only able to put away £4,000 a year and still automatically qualify for tax relief from then onward.
This is meant to prevent ‘pension recycling’ to gain a tax advantage – where people try to boost their retirement pot by generating extra tax relief.
If you breach the £4,000 limit, known in official jargon as the Money Purchase Annual Allowance or MPAA, you could face a big tax bill down the line.
And if you trigger the MPAA and don’t inform your current scheme within three months, you can also get landed with a £300 fixed penalty and a daily penalty of £60 a day.
Steve Webb, now policy director at Royal London, had his Freedom of Information request on how many people have been fined for this failure knocked back by HMRC.
One in four savers dipping into their pensions are still paying in too – but risk a shock tax bill
People who start tapping pots for any amount over and above their 25 per cent tax free lump sum are only able to put away £4,000 a year and still automatically qualify for tax relief from then onward.
Find out how to avoid this trap, and what happens if you have already fallen into it here.
An HMRC spokesperson said: ‘HMRC holds information falling within scope of the request, however, we estimate that it would exceed the Freedom of Information Act cost limit to provide this information.’
It told Webb: ‘The cases that might fall within the request are dealt with by HMRC on a case by case basis and the level of detail of our statistical measures means that we cannot readily identify the relevant information without interrogating each of our finalised or ongoing cases in detail.’
Read the taxman’s full response below.
Webb said: ‘It is truly astonishing that HMRC are presumably fining people for not complying with complex regulation but do not even bother to keep track of how many people they are fining.
‘HMRC would take a dim view of any taxpayer who did not keep proper records, yet they appear not to have a clue about their own actions. If large numbers of people are being fined for non-compliance then we need to know so that more can be done to alert customers as to their responsibilities under the law.
‘Even if HMRC have no historic information, they should, at the very least, start to keep records now.’
Webb thinks many people could be unwittingly triggering the MPAA, saying: ‘You don’t know what you don’t know. [Ex-Chancellor] George Osborne told me I could access my pension. Why would I then think “I wonder if I have triggered a limit on how much I pay into another pension”.’
Recent research by Canada Life found one in four over-55s dipping into pension pots are still making contributions.
Steve Webb answers reader questions about triggering the MPAA
Many are ‘blissfully unaware’ of the £4,000 limit, or that they must report overpayments and refund any tax relief to HMRC, the firm warned.
When a saver accesses a pension and takes an amount over and above their 25 per cent tax-free lump sum, their scheme is meant to send them a ‘flexible access statement’ within 31 days, which explains the MPAA limit.
They get three months from that point to notify any other ‘defined contribution’ pension schemes that they are actively paying into that they have triggered the MPAA, or they could be fined for failure to do so.
The MPAA was originally £10,000 when pension freedoms allowing over-55s to access retirement pots were introduced in 2015, but it was reduced to £4,000 in 2017 to stop people gaming the system.
HMRC expects people to volunteer information on overpayments into pensions and make refunds off their own bat – but if they don’t, the taxman will eventually find out about their contributions from pension schemes.
There could be a further, harsher penalty if HMRC believes you have intentionally been ‘pension recycling’.
Recycling big sums or breaking a host of other HMRC rules – including a ban on doing anything that is ‘pre-planned’ – can potentially attract charges amounting to 55 per cent of the sum involved.
What happens if you have tapped a pension and carried on paying in?
If you have only taken your 25 per cent tax-free lump, you won’t have triggered the ‘MPAA’ and are off the hook.
But if you have made withdrawals beyond that, then paid more than £4,000 a year into other defined contribution or ‘pot of money’ pensions – personal plans or work schemes where you bear investment risks, though not final salary pensions – you have to repay any tax relief you received to HMRC.
The £4,000 limit includes whatever your employer puts in, as well as you.
HMRC explains the rules on how to declare and make repayments here.
The MPAA limit used to be £10,000, but it was cut to £4,000 in April 2017.
What did Steve Webb ask HMRC and how did it reply?
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