Over 55s are being warned that plugging short-term income gaps by accessing their pension could greatly affect their retirement saving plan.
Since pension freedoms launched in April 2015, hundreds of thousands of savers have flexibly accessed their retirement pot each year.
But, with the high cost of living not set to go away any time soon, a retirement expert has warned “it is likely more over 55s will need to turn to their pension to plug a short-term income gap”.
Those who decide to do so are being urged to watch out for the money purchase annual allowance (MPAA).
A retirement expert said it's 'important to understand the consequences of flexibly accessing taxable income from your retirement pot'
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Tom Selby, head of retirement policy at AJ Bell, said: “It’s important to understand the consequences of flexibly accessing taxable income from your retirement pot.
“Most obviously, the earlier you access your pension, the longer it will need to last for in retirement.”
He said this means the person will either need to adjust their lifestyle expectations for retirement or boost pension contributions when one can.
The latter may not be as easy as it was before accessing the pension pot, though.
“Anyone who makes a flexible withdrawal from their retirement pot triggers the ‘money purchase annual allowance’ (MPAA), permanently reducing their annual allowance from £60,000 to £10,000 and removing the ability to ‘carry forward’ unused allowances from the three prior tax years,” Mr Selby explained.
“If you want to access your pension but are concerned about triggering the MPAA, consider just taking your tax-free cash or a portion of your tax-free cash, particularly where you are planning a one-off purchase rather than withdrawing a regular income.
“It is also possible to access up to three separate personal pension pots worth £10,000 or less without triggering the MPAA, provided each pot is extinguished in its entirety.
“You can access unlimited occupational pensions in this way without being hit with an annual allowance cut.
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Not all pension income with trigger the MPAA, however.
“Buying a lifetime annuity or receiving a defined benefit (DB) income, for example, will not result in an annual allowance reduction.”
The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.
The MPAA was increased this financial year, from £4,000 to £10,000 a year.
