Fears for over 55s affected by Covid as they now face being hit by pension restrictions
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Concerns that over 55s could have unknowingly scuppered their retirement plans because of a cap on how much they can transfer into their defined contribution pension every year have been raised by experts this week. Although they can take money out of these pots to tide them over during times of need, they may not have thought about the limit on how much they can transfer in a year, which will mean they are not able to put it all back.
According to latest figures from the Pensions and Lifetime Savings Association (PLSA), 7.3 million British people have a defined contribution pension but it is unknown how many over 55s have been dipping into it to tide them over during the pandemic.
Fears that this age group may have turned to taking benefits from their defined contribution pension as a temporary source of income to get by during the pandemic has led some in the industry to call for a change to the allowance.
When it comes to topping it up again, they could find themselves in trouble as the Money Purchase Annual Allowance is capped at £4,000 a year, so if they’ve taken out £4,000 for example, they won’t be able to put £4,000 back in.
Steven Cameron, Pensions Director at Aegon, said: “There are widespread concerns that the Money Purchase Annual Allowance of £4,000 has been set too low.”
Post pandemic, many of these people aged over 55 will want to go back to work and continue to put money away for a future retirement. However, those on moderate incomes could find the MPAA places a limit on future contributions, denting their ability to get their retirement plans back on track.
Mr Cameron explained: “We fear the MPAA is catching an increasing number of over 55s who take some of their pension flexibly, without realising the limit this places on future pension contributions, including through auto-enrolment workplace schemes.
“The pandemic has caused major disruption to many individuals’ employment or income, and many more over 55s may have turned to taking benefits from their defined contribution pension as a temporary source of income to tide them over.”
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Mr Cameron added: “It’s very concerning that HMRC isn’t collecting data on how many people are affected by this.
“Their data combines this group with those breaching the £40,000 standard annual allowance, or the tapered annual allowance, both of which consist of a very different population of people, mostly high earners, including those receiving a boost to their defined benefit pension because of a large salary increase.
“We urge HMRC to update the data it collects, to reveal the number of people whose retirement plans are being damaged by such a low MPAA.
“In the meantime, we would encourage the Government to urgently consider increasing the MPAA from £4,000 back to its original level of £10,000.”
With the disruption to employment caused by the pandemic, Aegon fears many more over 55s will have taken money from their pension to tide them over, but on regaining employment, they will be limited in their ability to get retirement plans back on track because of the £4,000 limit.
Individuals who break the MPAA must fill in a self-assessment tax return.
Meanwhile, HMRC said people can work out what tax they will need to pay on their pension savings if they have accessed their pension.
The Government website states: “If you flexibly access your pension, you’ll need to work out what your alternative annual allowance is and if you’ve gone above your other allowances.”
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Could my pension be affected?
If people have taken money out of a defined contribution pension or a qualifying overseas pension, they could be affected.
Someone has gone above the money purchase annual allowance if they’ve paid over £4,000 into all their defined contribution pensions from either the:
- Day after they first flexibly accessed their pension to the end of the tax year
- Whole of the tax year if they flexibly accessed in a previous tax year
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