A new rule of unintended consequences is pulling the rug from beneath retirement savers who take cash under pension freedoms with the intention of replacing the money before they stop working.
Pension freedoms for the over 55s allow them to draw cash from their savings as they wish.
Borrowing the cash from your pension and then paying yourself back with tax-relieved contributions sounds better than paying interest on loans, credit cards and overdrafts.
But many retirement savers do not realise taking the cash triggers a cut in the amount they can pay into a pension each year.
Instead of working to the £40,000 annual contribution limit, the amount is slashed to just £10,000 a year once pension freedoms are invoked.
Pension payment trap
And the government is considering slicing the limit again from April to just £4,000.
Cutting the contribution level takes away tax relief on money paid into a pension.
“It is highly unlikely that people will have any awareness of this major cut in the limit on pension contributions,” said Stephen Cameron, pensions director with financial provider Aegon.
“Those in workplace pensions benefit from a contribution from their employer, which also counts towards the limit. There may be some individuals who are attracted to the freedoms, who inadvertently bring themselves into the new £4,000 band and then have to turn down what can be a valuable contribution from their employer for the rest of their working life.”
The news comes in the wake of the latest official pension freedom figures.
Billions taken in cash
The Treasury says 549,000 retirement savers have withdrawn £9.2 billion from their pensions since April 2015.
Economic Secretary to the Treasury Simon Kirby said: “Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do.
“These figures show that people continue to take advantage of the choices on offer: choices only made available since the government’s landmark pension freedoms were introduced in April 2015.”
In the last three months of 2016, 1.5 million pension payments were made to 162,000 people totalling £1.56 billion.