Pension warning as Britons could unwittingly fall into 90 percent tax trap | Personal Finance | Finance

The Money Purchase Annual Allowance (MPAA) places a restriction on the amount people can pay into their pension and still receive tax relief. It is triggered when a person withdraws income from their pension scheme, not including any tax-free lump sums to which they are entitled.

It means the amount of contributions saved in a pension scheme before incurring a tax charge drops rapidly.

Instead of the £40,000 standard annual allowance, triggering the MPAA means individuals can only save £4,000 each tax year.

It represents a 90 percent drop in the retirement savings potential of Britons, which could be devastating.

It will also no longer be possible for individuals to carry forward their unused allowances from a previous tax year.

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If the MPAA has been triggered, it is possible for Britons to pay in contributions above the £4,000 limit.

However, they should be aware these will be subject to a tax charge.

This also applies to contributions made by a person’s employer or another third party – with the tax payable by the pension saver.

The Government-backed website MoneyHelper has explored one potential alternative for those who have triggered the MPAA.

It states: “Do you have a defined benefit pension that you’re still making contributions to? Then an alternative allowance might still be available to you, up to £36,000 each tax year.”

Alternatively, Britons can look towards other savings vehicles such as ISAs, which are tax-free, to help them continue saving towards their retirement goals.

As with all pension decision-making, the matter can often become complex especially as it relates to tax.

As a result, individuals are encouraged to speak to their pension provider or an independent, regulated financial adviser for further guidance.