For most people, their pension becomes available at the age of 55, rising to 57 in 2028, even if they plan to work past this point. It means you can access your pension while still working, providing flexibility. However, thousands are doing so unaware that it could affect their pension contributions in the future.
Third of over 55s plan to access their pension before retirement
When you access your pension for the first time, it’s important to have a plan in place. The decisions you make now could affect your income for the rest of your life, so a long-term outlook is essential. You also need to consider things like how you’ll access your pension, tax liability, and if you have multiple pensions, which ones to use first.
Retirement planning means pulling together a lot of different information and understanding regulations. Despite this, many people are accessing their pension without taking financial advice. An adviser can help you assess if a pension withdrawal is right for you and help you avoid traps.
With over a third of over 55s still working planning to access their pension before retirement, according to a report in the Telegraph, there’s a real risk that some will be caught out by the Money Purchase Annual Allowance. Doing so unwittingly could limit how much they’re able to contribute to pensions in the future and reduce tax efficiency. Yet, 80% of those aged between 55 and 64 are unaware of the potential cap.
What is the MPAA?
In most cases, you can contribute 100% of your annual earnings up to a maximum of £40,000 to your pension each tax year. You receive tax relief on these contributions at the highest level of Income Tax you pay. As a result, your pension receives an instant boost and makes saving for retirement efficient.
Please note, if your annual income is more than £200,000, your pension Annual Allowance may be reduced under the Tapered Annual Allowance rules. If you’re not sure what your pension allowance is, please get in touch.
The MPAA reduces the amount you can tax-efficiently save into your pension each year. If triggered, your annual allowance would reduce to just £4,000.
The rules around the MPAA are complex but the main situations where it will be triggered include, withdrawing your entire pension, putting your pension money into a Flexi-Access Drawdown scheme and starting to take a flexible income, or purchasing an Annuity.
You can take a 25% tax-free lump sum from your pension without triggering the MPAA. However, it’s still important to fully understand the impact of this decision. Taking a large lump sum early in retirement, or even before you retire, can have a significant impact on the income your pension will deliver.
Why does the MPAA matter?
The MPAA affects how much you can save tax-efficiently into a pension; this means it’s a particular concern among those who are still working.
If you access your pension at 55 but don’t plan to retire for another decade, the MPAA could significantly affect how much you’re able to contribute tax-efficiently to your pension in the next ten years. That means your pension pot can be far lower than expected, especially once you factor in tax relief and investment growth.
If you’re considering accessing your pension before retirement, it’s worth assessing the alternative options whether you want a lump sum or to supplement your income. Using savings or investments could make more sense and allow you to benefit from a higher pension Annual Allowance while you’re still working. There’s no one size fits all solution, so you should review your assets with your goals in mind.
Taking financial advice before accessing your pension
Before you access your pensions, whether you’re ready to retire or not, taking financial advice can provide you with confidence.
You’ve spent your career saving into a pension to create an income that will deliver a retirement lifestyle you can look forward to. But taking too much too soon or being unaware of tax traps could mean a retirement that you’ve worked hard for and that promised much doesn’t meet expectations. Taking financial advice can help you understand how the decisions you make now will affect your lifestyle in the future.
Please get in touch to speak to a financial planner about your pensions and how they can be used to create security.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.