Zarah ChoudharyAccording to Standard Life, 80% of over-50s in the UK are unaware of the Money Purchase Annual Allowance (MPAA), a rule that can significantly impact their pension contributions.
Withdrawing cash lump sums or drawing down from a pension pot to supplement income can activate the MPAA, limiting the ability to top up pensions during retirement.
Triggering the MPAA reduces the annual amount individuals can contribute to their pension with tax relief from £60,000 to just £10,000.
Standard Life said a lack of awareness could have serious repercussions for those transitioning into retirement, particularly for those planning to gradually reduce their working hours while drawing on their pension savings.
This gradual transition was found to be the preferred retirement strategy for nearly half (46%) of the UK population.
Only 5% of over-50s were familiar with the MPAA and understood when it would be triggered, while a further 9% had heard of the term but lacked detailed knowledge.
There was a gender disparity in terms of awareness, with 86% of women and 75% of men reporting they have never heard of the MPAA.
Standard Life noted that a lifetime annuity could provide a guaranteed income for life, starting any time after age 55, without triggering the MPAA.
It added that fixed-term annuities offer a guaranteed income over a set period, but might trigger the MPAA.
Pete Cowell, head of Annuities at Standard Life, said: “Awareness of the Money Purchase Annual Allowance is low and it can be a potential pitfall for those who are looking to access benefits and continue to top up their pension in the run up to retirement.
“This allowance has recently increased to £10,000, which could impact those looking to save larger sums.
“The MPAA won’t normally be triggered when purchasing a lifetime annuity, which provides a guaranteed income for life.
“Lifetime annuities can therefore be a beneficial way for older workers looking to start accessing some of their savings while also retaining the ability to pay significant sums into their pension.
“Having some level of familiarity with the tax rules when accessing your pension savings is vital to ensuring you’re maintaining your ability to save or not paying more tax than you need to.
“This is where the role of a financial adviser is particularly important, supporting people with their financial planning needs in their journeys to and through retirement.
“Individual annuities are worth considering for a number of reasons, and not least due to their ability to provide certainty through a guaranteed pension income, whilst preserving your pension allowance and your ability continue making significant contributions.”
