Calls for MPAA to be raised may overlook root of economic inactivity

If chancellor Jeremy Hunt wishes to succeed in bringing back older workers, he should consider reforming some of the “perverse pensions legislation” such as the money purchase annual allowance that may discourage many from going back to work, according to Quilter head of retirement policy Jon Greer.

“Under current legislation, any individual who accesses their pension flexibly triggers the MPAA, with the effect of reducing their annual allowance from £40,000 to £4,000 and thereby limiting their capacity to save into a pension once they return to work,” he said. 

The MPAA was intended to prevent wealthier individuals from recycling their tax-free cash into new pension arrangements.

“I don’t think that’s actually happened. The rule is very clear and if you’re recycling tax-free cash, it’s pre-planned,” Greer said. 

“The MPAA should be restored to the pre-2017 level of £10,000 per annum, which would alleviate the risk of hitting the MPAA for most people and remove the clear disincentive for older people to go back to work.”

Cost of living is catching people out

Older workers are perhaps right to be concerned about the low threshold, when government data shows that one-quarter of pension savers over the age of 55 contributed more than £4,000 a year to their pensions in 2020-21, according to AJ Bell. 

Official figures reveal that £3.6bn of flexible pension withdrawals had been made by more than 500,000 individuals between April 1 and June 30 2022 – a 23 per cent increase on the same period in 2021.

The MPAA should be restored to the pre-2017 level of £10,000 per annum, which would alleviate the risk of hitting the MPAA for most people and remove the clear disincentive for older people to go back to work Jon Greer, Quilter

This prompted AJ Bell to write to the Treasury to warn that rising inflation risked forcing people to dip into their pensions earlier and to call for the MPAA to be raised to £10,000.  

“There is mounting evidence that squeezed savers are being forced to turn to their pension pots to make ends meet during the cost of living crisis,” said AJ Bell head of retirement policy Tom Selby.

Inflation is the most likely driver, but many parents and grandparents may be dipping into their pension to help their families cope with rising prices, he added.

Those who trigger the MPAA by accessing taxable income flexibly from their pension for the first time, will feel a significant impact on their ability to rebuild their retirement fund, as the MPAA permanently reduced an individual’s annual allowance from £40,000 to just £4,000, while removing the ability to carry forward unused allowances from the three previous tax years.

Breeching the allowance will also trigger a tax charge to recoup the up-front tax relief received. Without advice or guidance, individuals may find themselves on the wrong side of the regulations. 

“Keeping this roadblock to saving for retirement in place isn’t just bad for individuals, it runs counter to stated government policy,” said Selby.

“The government is desperately trying to get older people back into the workforce, yet by setting such a low MPAA it is creating a disincentive by limiting their ability to build or rebuild their pension.

“As a minimum, the chancellor should increase the MPAA to £10,000, the level it was originally established at. However, over the medium term the Treasury should consider whether the MPAA is necessary at all.”

You don’t need to be rich

Though the MPAA was designed to prevent high earners recycling tax-free cash, workers earning less than the average UK salary may find themselves sailing close to the threshold. 

Data from Canada Life shows that (see table below) a worker in their fifties who joins a good defined contribution pension scheme only needs to earn above £26,667 to fall foul of the MPAA. 

These contribution levels include both employee contributions, employer contributions and tax relief.

Salary levels at which the MPAA is relevant, for different MPAA levels and contribution rates

Source: Canada Life. 8 per cent is the default auto-enrolment contribution rate; 12 per cent is the minimum required for the pension quality mark; 15 per cent is the rate required for the pension quality mark-plus; 25.6 per cent is the average contribution rate for a private sector defined benefit pension scheme.

Canada Life estimates between 500,000 and 1mn people in the UK of working age are now restricted by the MPAA, based on the numbers making use of pension freedoms and the fluctuations in employment patterns over the course of the pandemic. 

The company estimates the cost to the Treasury of changing the MPAA back to £10,000 at approximately £75mn a year, according to the Treasury’s original impact assessment. However, returning an additional 100,000 to employment on an average wage of £30,000 a year would generate income tax revenues alone of £400mn.

“[It] would help strengthen the UK economy and boost the retirement provision of the hundreds of thousands of workers who left employment during the pandemic,” said Lindsey Rix, chief executive of Canada Life UK  

“We believe this is a measure that would positively impact people of all social and economic backgrounds. It would help encourage a return of older experienced staff for many businesses, large or small, and whichever sector they operate in. 

“And it will align well with other government policy initiatives, such as the mid-life MOT and auto-enrolment.”

It’s not as simple as that 

However, new research from LCP shows that the number of people of working age who are retired is lower now than before the start of the pandemic. By contrast, there are around 333,000 more long-term sick.  

Further data shows that the sick would prefer to return to work rather than those of working age who have retired.  

The research by LCP found that the growth in economic inactivity is not constrained to just those aged over 50. Almost half (45 per cent) of the chancellor’s 630,000 indicating the growth of inactivity are aged below 50. Many of those under the age of 50 are also in full-time education. 

Using the same definition as the chancellor, plus three more months of data, the research found that the increase in economic inactivity was 516,000, though the number of “retired” had fallen slightly. 

Commenting on the research, LCP partner Sir Steve Webb said: “There is a real risk of the government ‘barking up the wrong tree’ when it comes to the growth in economic inactivity.  

“Policy solutions which aim to reduce early retirement or to encourage the retired out of retirement are likely to have only limited effect in reversing recent trends. Instead, the policy effort needs to be focused around understanding why flows into long-term sickness have grown and on early intervention to prevent people’s health from deteriorating. 

“Without action there is a risk of a growing core of people stuck in long-term receipt of sickness benefits with limited prospect of returning to paid work and damaged prospects for retirement.”

Same as it ever was...

Whether ill or retired, corporate culture may require an overhaul before older workers are put to work in the economy. 

Recent research by the Chartered Management Institute found that despite the shifts in society and the workplace, ageism remains alive and well. 

A study found that out of 1,000 employers, only 42 per cent would be open to hiring older workers aged between 50 and 64 than bringing in younger talent.

For those aged above 65, the number drops to only three in 10, while 20 per cent said they were not open to hiring individuals from that cohort at all.

Pádraig Floyd is interim editor at FTAdviser's sister publication Pensions Expert