How to avoid being trapped by the Pension Freedoms

The last few years have opened up a number of options for those looking to access their pension benefits and many have taken advantage of the new freedoms. Latest statistics show that in Q3 of 2016 alone, £1.67 billion was invested in 22,000 income drawdown products, an average fund size of just over £76,000 .

In the light of the new flexibilities, many of those utilising flexi-access drawdown have used a one off withdrawal from their pension funds to top up their existing income sources, allowing them to treat themselves to a new car or go on the round the world trip they had always dreamed of – and why the devil not, you’ve worked hard to save the money, make sure you enjoy it!

However, whilst funding your ideal lifestyle there are various pitfalls that need to be avoided if this is to continue in the long term. The Money Purchase Annual Allowance (MPAA) is one such hazard that needs to be carefully factored into any plans for pension withdrawals for those who wish to continue making pension contributions after the withdrawal has been made.

The MPAA limits the amount of tax-relievable contributions that can be made to a money purchase pension scheme, such as a personal or workplace pension, once any pension income has been drawn using the 2015 pension flexibility rules.

From April 2017, the MPAA has been reduced to £4,000 down from the initial level of £10,000. This represents just 10% of the unrestricted annual allowance of £40,000 per annum and severely limits the efficacy of future contributions.

Once you are subject to the MPAA, you will be for the rest of your life and as such one ill-advised withdrawal from a pension to fund that once in a lifetime trip or dream car could have serious repercussions on your financial plans.

The MPAA does not apply if you only withdraw the tax free lump sum element of your pension and as such with a properly planned withdrawal, your pension can still be used to fund that lifelong objective without restricting your future financial plans.

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