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DIY drawdown customers may face tax bills due to ignorance of rules


Those approaching or in retirement could be faced with unexpected tax bills due to levels of awareness of the Money Purchase Annual Allowance (MPAA), according to new research from Canada Life.


In the firm’s survey of non-advised over 55s who are taking an income from drawdown, 22%1 said they were unaware there is an annual limit to the amount you can continue paying into your pension once you start drawing it.


Andrew Tully, Canada Life technical director, said:


“While not everybody we surveyed will still be paying into their pension, it is nonetheless concerning that many people are unaware of the restrictions and potential tax implications if they continue to do so. The severe restrictions on the amount that can continued to be paid into a pension once benefits have been drawn are likely to catch many people out, leaving them vulnerable to large tax bills."


“Navigating the various rules around pensions and retirement can leave people exposed, especially if they have chosen a DIY retirement. Many people are taking advantage of the pension freedoms and yet have no plans to fully retire for many years, so the MPAA is likely to catch out the unwary."


“HMRC2 admits it isn’t collating data on this issue, and says it is incumbent on individuals to declare additional savings via the self-assessment process. This might sound sensible until you consider the many people who have flexibly accessed pensions without advice who have previously never experienced the self-assessment process and remain blissfully unaware of the problem.”


The Money Purchase Annual Allowance explained


The MPAA was introduced in April 2015 to prevent people using the pension freedoms to recycle money through a pension and effectively receive additional tax relief on those savings. The MPAA restricts the amount available to save into a pension once it has been ‘flexibly accessed’, with the limit triggered for example by taking an income from drawdown. In practice this means anyone who has withdrawn either a cash lump sum or income in excess of their 25% tax-free lump sum from defined contribution type pensions.


The restrictions include any payments into a pension, both made personally or via an employer. The MPAA was reduced from £10,000 to £4,000 in April 2017. The charge effectively cancels out the tax relief on contributions over the allowance at the individual’s marginal rate of income tax.


As an example, someone who is taking an income from their drawdown portfolio but still working, earning £50,000 a year, and together with their employer paying more than 8% into their pension would face a MPAA tax bill.


Andrew Tully said:


“Getting professional financial advice can help you work out the best approach based on your individual circumstances, ensuring you get the most out of your hard-earned savings, rather than sending large amounts to the taxman.”


1. Source: The research was conducted online by Censuswide between 5.11.2018 and 9.11.2018 among 500 respondents aged 55+ with income drawdown investments.

2. Source: Canada Life Freedom of Information Request dated 10.8.2018.

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Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.