Cashing Pensions Willy-Nilly Can Seriously Affect Your Wealth

18 May 2021

Never cash in a pension without taking personal financial advice.  If you do, you will probably trigger a little-known tax rule known as the Money Purchase Annual Allowance (MPAA).  The MPAA limits how much you can put into a pension subsequently, and how much your employer can put in on your behalf, to a total of £4,000 per annum rather than the normal £40,000 per annum annual allowance.

Now I’m sure some people will say “This is irrelevant – who can afford to put £40,000 into a pension?”  It’s certainly true that few people can afford to fund a £40,000 contribution year-in year-out but we come across lots of people of fairly modest means who have plenty of cash savings in the building society but little or nothing in their pension.  

If somebody is earning £40,000 and has £32,000 in the bank, that £32,000 can be turned into a pension contribution to get them an immediate tax relief add-back of £8,000, making their £32,000 up to £40,000 instantly with nil risk.  If they maybe want to retire a year or two before their state pension age, this kind of planning can make all the difference.  

All advisers come across clients for whom, with just a few relatively simple changes, they can make ordinary people significantly better off than might otherwise have been the case.  Often though we also meet people who, instead of getting advice, have done something with their finances – like cashing in a pension – which severely limits what we can do for them.  We have dealt with clients who could almost certainly have retired at 66 or 65 or even earlier still, but who will now almost certainly need to work to age 67.  It’s a simple message: Always get advice. Your first fact-finding meeting will always be offered at our expense with no obligation on your part.