More than one-in-10 (14%) of UK working adults aged 55 or over accessed their pensions in 2020, research by Canada Life found.
But two-fifths of the 1,013 surveyed are not aware of the restrictions associated with entering drawdown such as the Money Purchase Annual Allowance (MPAA), which significantly reduces the yearly sum they can contribute to their pots from £40,000 ($55,600, €46,020) to just £4,000.
Only 40% know that there are restrictions in place, but don’t know their extent, as many overestimated the allowance at almost £7,000 a year.
Among those that decided to access their pensions, 42% said it helped top-up their income, a quarter made home improvements, and 17% put the money into other savings vehicles.
But more than half (55%) continued to pay into their pension after entering drawdown. As a result, many risk breaching the MPAA.
‘Deeply unfair’ limit
Andrew Tully, technical director at Canada Life, believes it is now time to review the MPAA system, and scrap it or at least increase the allowance to its previous threshold of £10,000.
He said: “The MPAA is quite simply penalising people for doing the right thing. Retirement journeys are changing, and it is no longer the cliff-edge event it used to be. Many more people are choosing to retire later for a variety of reasons and continue working in older age, either by reducing their hours, setting up their own business or perhaps embarking on a less pressured career.
“Particularly after the financial stresses of the last year, it is understandable that people have chosen to access their pension savings for any number reasons, perhaps to top up their salary under furlough or to make those essential home improvements.
“This has become an increasingly popular financial decision as more than £40bn has been withdrawn from pension savings since the inception of pension freedoms in 2015. This continued growth in the number of individuals accessing their pensions implies that we are seeing more and more working people look to their pension pot to manage their expenses or cover unexpected costs. To then limit their ability to add to their pension pot to £4,000 a year is deeply unfair.
“Given the impact covid is having on our country, there is a strong case for reviewing the MPAA, so those who access taxable income from their pension can re-build their savings once this crisis is over.
“At the very least the MPAA should go back to the previous limit of £10,000, although my preference would be to scrap it altogether. The Treasury may worry about tax leakage, but the much greater issue in my view is the lack of retirement savings which many people have.
“Scrapping the MPAA removes an unnecessary complex barrier and may help many who were in financial hardship rebuild their retirement savings.”
