The Association of British Insurers has joined calls for the money purchase annual allowance to be scrapped ahead of next week’s Budget.
The ABI said the MPAA should be ditched so pension savers who have had to dip into their retirement savings during the pandemic are not penalised for paying it back when they can.
It said the move would also incentivise older workers to continue saving into their pension, improving their financial resilience.
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 each year without incurring a tax charge.
It was introduced to stop people recycling cash through their pensions.
It is currently set at £4,000 after the government cut it from £10,000 in 2017.
According to the ABI, people on the average salary for a 50-59 year old (£33,231) paying the minimum employer and employee contributions would only have to pay an extra £151 a month to their pension to exceed the MPAA - missing out on pensions tax relief for contributions above that amount.
Someone earning the average salary for over 60s (£28,854) would have to pay an extra £183.
It also means additional paperwork, including filling in a tax return and having to tell any other pension schemes that the MPAA applies.
Yvonne Braun, director of policy for long-term savings and protection at the ABI, said: “Covid-19 has shown that households’ financial resilience can be fragile and addressing that should be a central part of the nation’s Covid-19 recovery.
“Removing or increasing the Money Purchase Annual Allowance will help incentivise older workers to save.
“This will improve their financial resilience and also make sure people are not penalised for doing the right thing by paying money back into their pension when they can afford to.”
AJ Bell first called for the MPAA to be scrapped back in March 2020.
Tom Selby, senior analyst at AJ Bell, said: “Even before the pandemic struck, slashing someone’s pensions annual allowance by 90 per cent - from £40,000 to just £4,000 – merely for accessing £1 of taxable income from their retirement pot felt grossly unfair.
“But during a period of national lockdown, when millions of families are already facing severe income pressure as unemployment rises, it feels particularly unjust.”
He added: “Regardless of the circumstances, the MPAA is applied indiscriminately and permanently, leaving people facing an uphill battle to rebuild their retirements.
“This wrongheaded policy, which also runs counter to increasingly flexible working patterns, must now be rethought as a matter of urgency.
“If this review needs time, in the interim the Chancellor should increase the MPAA to £10,000 – the level it was originally introduced at in 2015 – to give savers a little more flexibility.”
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