“You’ve Got to Pick A Pocket Or Two” is a song from the musical Oliver, sung by the character Fagin – who is not a fan of paying tax unnecessarily.
HMRC has just revealed that some 980,000 individuals over the age of 55 flexibly accessed their defined contribution pension savings for the first time between April 2015 and the end of September 2018. In doing so they triggered the Money Purchase Annual Allowance (MPAA), and became irreversibly subject to the MPAA of just £4,000 a year. This means that defined contribution pension contributions either paid by them, or their employer on their behalf, are now limited to £4,000 a year with any balance being subject to a tax charge. Had they not flexibly accessed their pension savings, their annual allowance would have remained at £40,000 a year – ten times more.
The tax rules around pensions are far from straightforward, and not everyone dipping into their pension savings is aware of the possible impact on future pension contributions. Canada Life research has found that one in five non-advised drawdown clients are unaware of the MPAA. Many of the 980,000 individuals involved may have fully intended to continue making pension contributions in the coming years. It has never been more important for those thinking of accessing their pension savings, especially in partial retirement, to take independent advice from someone authorised by the Financial Conduct Authority (FCA). (Please do, by the way, check that your adviser is authorised by the FCA, as not all are.)
With the raising of the State Pension age, more people are likely to work longer and possibly consider flexible retirement, perhaps working one or two days less a week but still earning reasonable salaries. They need to be careful not to get their pocket picked by HMRC by taking a flexible payment from their pension savings too early. There are also those still working full time who may think an easy way of getting a lump sum is to dip into their pension benefits using the new pension flexibilities. It’s clear this has the capacity to impact on many pension savers, and not just high earners. Fagin, after all, did not confine his activities to picking the pockets of the rich. We were told last September that HMRC does not have any data on how much tax it collects through the MPAA, so we can only guess at the scale of tax being collected.
For those who have unwittingly triggered the MPAA, and who find they are now paying tax they could have avoided, HMRC could adopt the line in the song “charity’s fine, subscribe to mine.” They are, after all, picking a pocket or two.