Flexible Pension Benefits leading to Potential Tax Confusion

The Money Purchase Annual Allowance (MPAA) is the annual limit on contributions towards money purchase arrangements, such as flexible pension drawdown, that can be made before a tax charge applies.

Savers across the country are finding out that alongside the flexible rules on accessing pension benefits comes potential confusion about the implications for future tax relief.

Individuals taking advantage of pension freedoms can enjoy tax relief on contributions up to the value of £40,000 each year, however this is reduced to the MPAA level once a flexible income withdrawal has been made. The MPAA rate for tax year 2019/20 is £4,000.

More than one million savers are estimated to have been affected by the MPAA since its introduction, becoming subject to strict regulations which can dramatically reduce the tax efficiency of their pension.

While taking a tax-free 25% lump sum is not subject to the MPAA, savers looking to take advantage of pension flexibility should consult an independent financial adviser such as McCreas to ensure they safeguard the future value of their pension pot and avoid nasty surprises in their tax liability.

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