Savers risk a £300 fine and further daily penalties if they dip into an old retirement pot and fail to tell their current pension provider – but it is unknown how many are falling into this obscure trap.
Ex-Pensions Minister Steve Webb, who is trying to raise awareness of the penalty for not keeping your present scheme updated, made an unsuccessful attempt to find out how many people HMRC has fined since 2015. Other dangers of tapping old pots while still making ongoing contributions have been flagged by many financial experts.
Savers who access any amount over and above their 25% tax free lump sum are only able to put away £4,000 a year and still automatically qualify for tax relief from then onward. This is meant to prevent ‘pension recycling’ to gain a tax advantage – where people try to boost their retirement pot by generating extra tax relief.
If you breach the £4,000 limit, known in official jargon as the Money Purchase Annual Allowance or MPAA, you could face a big tax bill down the line. And if you trigger the MPAA and don’t inform your current scheme within three months, you can also get landed with a £300 fixed penalty and a daily penalty of £60 a day. Steve Webb, now policy director at Royal London, had his Freedom of Information request on how many people have been fined for this failure knocked back by HMRC.