More than one million people aged over 55 are now subject to harsher pension contribution limits as a result of using the pension freedom rules, Just Group research has found.
HM Revenue & Customs (HMRC) told the firm that an average of 70,000 people each quarter have taken a flexible payment for the first time from their pension since Freedom and Choice was introduced in April 2015.
Accessing pots before retirement age means those continuing to save into a defined contribution (DC) pot see their annual allowance cut by 90%.
While tax relief is normally available on pension contributions of up to £40,000 a year, once a flexible withdrawal has been made, savers become subject to the money purchase annual allowance (MPAA) of £4,000.
Just Group communications director Stephen Lowe explained that, while accessing money in a pension pot is easy, "grasping all the future tax implications is much more difficult."
He said: "It's a huge drop in how much people can save and lays a tax trap for the unwary. Being subject to the MPAA reduces the options, adds to the complexity and increases the amount of paperwork."
He said the situation is complicated because not every withdrawal from a pension would be classed as a flexible payment, for example taking a 25% tax-free lump sum from a DC pension pot is not a flexible payment, therefore meaning the MPAA would not apply.
However, any subsequent withdrawal from the fund is a flexible payment meaning the MPAA limits will tighten.
Lowe explained: "Many people dipping into pension money fully expect to continue making contributions for years to come. It's not the super-rich who are going to get caught out but perhaps someone on a reasonable salary who gets a good promotion, a self-employed person or director who has a profitable year, or someone who missed a few years of contributions and wants to catch up."
The MPAA was reduced to £4,000 in 2017 from £10,000, imposing tighter limits on those who had already taken flexible payments from their pension pots.
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