Pension ‘bear trap’ could mean you lose out on 90 percent of savings ability – check now | Personal Finance | Finance
Pension saving is considered key for retirement, but it also comes with rules and regulations. One of these is the amount individuals can withdraw from their pot when it comes to retirement.
Pension freedoms rules introduced in 2015 have given Britons more flexibility to access their savings as and when they choose.
Indeed, more people are likely to turn to their pension pots to cover any income losses or cost of living rises this year.
But there is a vital rule to bear in mind, which if not heeded could mean a 90 percent cut in savings potential.
Tom Selby, head of retirement policy at AJ Bell, said: “Anyone who makes a flexible withdrawal from their retirement pot for the first time triggers the ‘money purchase annual allowance’ (MPAA).
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This applies both to the current tax year, as well as the coming tax year.
Implications of withdrawal could follow a person for the rest of their life, so the decision is important.
If a person is worried about triggering the MPAA, they should act carefully.
Mr Selby added: “Consider whether just taking tax-free cash could be sufficient, particularly where a person is planning a one-off purchase rather than taking a regular income.”
MoneyHelper explains: “You can’t bring forward any unused annual allowances from the previous three tax years to allow contributions of more than £4,000 to defined contribution pensions.
“It might be possible to carry forward unused annual allowance for use in defined benefit pensions.”
The MPAA will only start to apply from the day a person takes flexible benefits.
This means that any previous savings will not be affected.
