Pension contributions can receive tax relief up to £40,000 per year or 100 percent of a person’s taxable salary. However, should a person start taking money from their defined contribution pensions, the tax incentives can be diminished.
Stephen Lowe, the group communications director at Just Group, commented on this: “Taking tax-free cash from a pension is relatively straightforward but taking taxable income from a pension creates much more complexity.
“The idea that you have the freedom to use your pension like a bank account – paying in or drawing out when you want without any knock-on consequence – is simply not how the system works.
“The first taxable withdrawal can trigger an overpayment of tax that will need to be reclaimed – the Government has had to pay back more than £692million to pension savers who have overpaid tax on flexible withdrawals since 2015.
“On top of that, the MPAA rules kick-in, slashing the amount savers can add to their defined contribution pension while still benefiting from tax relief to less than £72 a week which can cause problems for people who had planned to top-up their pension savings in the run-up to retirement, perhaps when the mortgage was paid off and kids had left home.”
Many experts within the field were expecting Rishi Sunak to tackle pension tax issues in today’s “tax day” but many dubbed the announcements made to be a “damp squib”.
James Jones-Tinsley, a Self-Invested Pensions Technical Specialist at Barnett Waddingham, was particularly critical of the Chancellor: “It’s a tale as old as time – a much anticipated day of policy reform has left the pensions industry shocked by the deafening silence of the Government on the issues that matter most. With barely a bullet point dedicated to a handful of technical updates, trustees, advisers, and savers alike have been disappointed.
“At the very least, a simplification of pension tax relief is well overdue – and in fact, it was a manifesto commitment of this Government to support the 1.5 million low-paid workers, mostly women, harmed by the tax relief discrepancy between ‘relief at source’ and ‘net pay’ workplace pension schemes.
“We should have seen a scrapping of the Money Purchase Annual Allowance (MPAA), which has been revealed as negatively impacting 1,000 savers each working day, as well as the abolition of the harmful Tapered Annual Allowance (TAA).
“Instead, the Treasury has squandered the opportunity to make real change – and the clock is ticking. If we don’t see action soon, the UK’s looming pensions crisis is only going to get worse.”
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