TaxAug 13 2019

Govt told to lift 'little known' pensions cap

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Govt told to lift 'little known' pensions cap

Aegon is calling for the money purchase annual allowance to be raised from the current £4,000 to £10,000, saying savers could too easily be caught by the limit when accessing their pensions.

According to analysis from the pension provider, individuals earning £30,000 who, alongside their employer, are contributing sums equivalent to 14 per cent of their salary to a money purchase pension, would be caught by the MPAA if they enter drawdown.

Higher earners will be caught even if paying far lower contribution rates, Aegon stated. Someone earning £50,000 with a shared employer and employee contribution rate of just 8 per cent of total earnings would be caught out, it stated.

The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.

The allowance was cut from £10,000 to £4,000 in April 2017, following an announcement in November 2016.

At the time of the announced cut, the government said it wanted to ensure savers were not recycling cash through their pension.

FTAdviser reported last September that the government isn’t able to evaluate the effectiveness of its cuts to the MPAA, because it does not have the data on how much tax is collected through this allowance.

Previous research from Aegon showed that half (49 per cent) of UK workers - over 50 years of age and earning upwards of £20,000 - want to transition into retirement by blending reduced working patterns with partial retirement.

But under the MPAA, anyone who flexibly accesses their pension benefits, is effectively barred for life from paying in more than £4,000 a year in total to all defined contribution pensions, unless prepared to pay a penal tax charge, the provider stated.

Due to this, Aegon called for the limit to be substantially increased, so “people can have the freedom and flexibility to transition into retirement at their own pace, without it curtailing their future retirement savings”.

The provider would like to see the previous £10,000 limit reinstated, which “would dramatically reduce the number who otherwise accidentally damage their future retirement prospects”.

According to Steven Cameron, pensions director at Aegon, retirement is no longer a ‘cliff-edge’ event, with many people now looking for a change of pace rather than wanting to give up work altogether.

He said: “People have embraced pension freedoms with many accessing part of their pension flexibly before they fully retire.

"But few realise this comes with a sting in the tail in terms of how much they and their employer can then contribute in total to pensions in the future, without the individual receiving a penal tax charge.”

He noted that the MPAA was putting thousands of older workers at risk of finding out too late that they have damaged their future pension potential.

He added: “Barriers to contributing above £4,000 a year in later working life could leave individuals thousands of pounds out of pocket, through having to turn down valuable employer pension contributions.

“It could even mean that they opt out of being automatically enrolled into a workplace pension because their combined employer and individual contributions are above £4,000.

“This little-known cap is undermining the widely applauded pension freedoms and auto-enrolment, and we would like to see it returned to the original £10,000 limit to reflect the current attitude of the working population when they consider retirement.”

maria.espadinha@ft.com

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