More than half (56 per cent) of British retirees have never heard of the Money Purchase Annual Allowance (MPAA), research from Legal & General Investment Management (LGIM) has found.

LGIM warned that the MPAA can “significantly” reduce the annual tax-free amount a saver can pay into their pension and has the potential to “wipe out” as much as 90 per cent of the taxable benefit should members continue to pay into their pension.

Despite the lack of awareness, more than a quarter (27 per cent) of savers thought that the MPAA would affect them after the concept was explained to them, with only 15 per cent stating that they had been aware of the consequences but chose to proceed anyway.

The MPAA was identified as a particular concern for women, who are more at risk from the side effects of tax-free cash due to smaller average pot sizes and were more likely to be hit by the penalty, with 31 per cent stating that the loss of the MPAA would apply to them, compared to 22 per cent of men.

In addition this, women were found to be “significantly more likely” to put this tax-free cash into a savings account, current account or cash ISA, with 29 per cent of women taking this course of action compared to 19 per cent of men.

However, LGIM warned that this could leave savings vulnerable to a low interest rate instead of generating an investment return in their pension.

Indeed, after being shown the potential return differentials over the past 10 years, nearly half (47 per cent) of those who had already taken part or all of their tax-free cash said it would make them think twice about taking out more tax-free cash than they needed.

In addition to this, 43 per cent said they would reconsider withdrawing any tax-free cash from their pension at all until they reached retirement.

A further 70 per cent of retirees also said they would be interested in splitting their tax-free cash allowance across several years in order to provide an income and would have changed their approach if given another opportunity, after it was explained that they could use their tax-free cash as retirement income rather than a lump sum.

However, two-fifths (40 per cent) of retirees were not even aware that they could take less than the 25 per cent, with “considerable confusion” as to how to do so.

Commenting on the findings, LGIM co-head of defined contribution, Rita Butler-Jones, commented: “The option to take a tax-free cash lump sum from a pension is probably the best known perk, yet so many savers admit that they would make different choices when given more information.

“In fact, our data shows that women in particular have a greater response rate when communicated to by pension providers so there is a clear desire and willingness to make better-informed choices.

“However, too often we see women are left worse off financially as a result of the stark gender pensions and pay gaps and this imbalance continues through poor choices as they move into retirement.

“As an industry, this issue rests on all of our shoulders and it is important that we continue working together to educate and inform our members of all the options that are available to them, so that they can make the right financial decisions for their future.”

Industry research has previously found a lack of awareness around the MPAA, prompting calls for the penalty to be scrapped or changed, particularly amid the impact of the pandemic, with the upcoming Budget highlighted as a potential opportunity for this.

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