PensionsJun 4 2020

Change the MPAA to help people in crisis

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Over the coming months, millions of people will find themselves enduring an income shortfall through no fault of their own.

At the last count, 8.4m people in the UK had been furloughed.

A further 2.3m claims have been filed for the self-employed equivalent. They face a substantial income drop, receiving the lower of 80 per cent of their pre-crisis wage, or £2,500 a month.

Many others are ineligible for the schemes and face even greater earnings disruption.

Regrettably, things may get worse before they get better. There are already signs that unemployment will beset millions.

The MPAA has always represented a hammer to crack a walnut

The number of out of work benefit claimants soared 70 per cent to over 2m in April alone. It is likely to be just the tip of the iceberg as companies face tough choices over who to retain as the furlough scheme is unwound.

It is critical we ensure this short-term financial shock does not cause long-term damage to our future prosperity.

The government should take steps to address a flaw in the pension system that will punish workers' finances when they return to work.

Anyone that dips into their money purchase (also known as defined contribution) pension for the first time to supplement their income during this crisis will trigger the Money Purchase Annual Allowance (MPAA).

This will limit their annual pension funding limit to £4,000 once they return to normal employment. Any contributions over that amount will attract an annual allowance tax charge.

The MPAA has always represented a hammer to crack a walnut, with pension savers losing 90 per cent of their pension annual allowance for withdrawing just £1.

And it is not only the very highly paid that are impacted either.

Our calculations show that someone on £50,000 a year and making just the bare minimum contribution under auto-enrolment will utilise 87 per cent of their annual allowance if they trigger the MPAA.

Even someone on a salary of £27,000 a year (below the national average) would breach the MPAA if total contributions of 15 per cent were made, something approaching a recommended amount to achieve a comfortable retirement. 

For those affected by the MPAA limit on contributions with tax relief, they can claim a up to £1,600 of tax relief for higher rate taxpayers, and £800 for those on the basic rate.

Their peers that retain the full £40,000 allowance could claim ten times as much, in some cases even more.

This is an unreasonable penalty and will damage the long-term financial prosperity of those people that use their pension to meet an income shortfall in the crisis.

This pandemic should not cost anyone the right to fund a prosperous retirement for themselves.