Pensioners with cashflow issues must think carefully about how they withdraw money from their pension to avoid triggering a tax event, Quilter has warned.
The firm emphasised that short-term withdrawals in particular should be considered carefully, as triggering the Money Purchase Annual Allowance (MPAA) will “severely limit the contributions” that can be made in the future.
Quilter retirement expert, Ian Browne, commented: “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 firm highlighted that if pensioners withdraw money out of a small pot of under £10,000, then they will be able to avoid triggering the MPAA, with some providers specifically designing their pension product to facilitate this exemption.
“However,” Brown clarified, “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”.
This also follows warnings from the Association of British Insurers that those aged 55 and over need to be cautious about utilizing pension freedoms in this time.
Browne added: “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.”
Industry experts have previously raised concerns over the impact of the MPAA amid the coronavirus pandemic, with AJ Bell calling on the government to scrap the allowance as part of its response to the crisis.
This echoed previous calls from former pensions minister and LCP partner, Steve Webb, who called for the rules to be relaxed, if not abolished, and suggested an upper limit of £10,000, rather than the current £4,000.
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