personal finance

Pension ‘dippers’ face tax relief shock

Thousands of over-55s who dip into their pension pots while continuing to benefit from workplace pension contributions are at risk of shock tax charges, experts say.

The warning this week followed figures that showed 264,000 individuals aged over 55 had withdrawn a record £2.3bn from their pensions in the three months to June, potentially slashing tax relief on future contributions.

Normally, relief is available on contributions of up to £40,000 a year, known as the annual allowance, but if an individual aged 55 or over has taken money out of a “defined contribution” type pension, this may reduce the standard annual allowance to £4,000.

The saver will be hit with a tax charge if total pension contributions exceed their annual allowance, whether this is the standard £40,000 or reduced £4,000 money purchase annual allowance (MPAA).

This charge effectively claws back any excess tax relief on contributions, so applies at either 20 per cent, 40 per cent or 45 per cent.

“I have a major concern that many of the people taking cash from their pensions will be inadvertently exposing themselves to the MPAA tax trap,” said Malcolm McLean, senior consultant with Barnett Waddingham, the professional services firm.

“By drawing as little as a few pounds out of their pension (other than the allowable tax-free cash element) they will
be immediately caught by
the MPAA.

“This has not been well
publicised and will come
as a severe shock to those
hit with it.”


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