Pension savers over the age of 55 are unintentionally triggering the Money Purchase Annual Allowance by tapping into their pension savings to tide them over with the growing cost of living, according to a new report.

As energy bills and other costs of living grow, it could be temping for over 55s to tap into their pension savings.

But according to consultancy LCP, many are triggering the Money Purchase Annual Allowance (MPAA), making it harder to build their pension pot back in the future,

Pension savers who access a DC pension pot worth over £10,000 can trigger the MPAA which reduces their annual limit they can contribute to their pension without paying tax to £4,000 (from £40,000).

According to the report from LCP, those who have dipped in to their pensions now may find that they cannot take advantage of the upturn to rebuild their pensions as quickly as they would wish and may run out of time to undo the damage.

Steve Webb, partner at LCP and former Pensions Minister, said: “It is entirely understandable that people under severe financial pressure may consider tapping into their pension savings to help pay the bills.  But they need to be aware that there are hidden risks in doing so. 

“Those who use ‘pension freedoms’ legislation to take taxable cash in a lump from their pension could trigger a much reduced annual allowance which will make it harder to rebuild their pension in the future. 

“Coming on top of the impact on standards of living in retirement, these hidden risks provide additional reasons to regard using pensions to help with short-term spending pressures as an absolute last resort.”

LCP also warned that a lump sum withdrawal could also trigger an emergency tax rate.

If a pension provider does not hold a standard tax code for a saver, under HMRC rules they have to deduct tax at a higher emergency rate. Although this excess tax can be reclaimed, it means the saver can be short of cash in the shorter term.

HMRC has returned around £900m in overpaid emergency tax on pension withdrawals since the introduction of pension freedoms in 2015.