A group of 17 providers, consultants and professional bodies have banded together and written to the Treasury asking the government to restore the Money Purchase Annual Allowance (MPAA) to its previous level of £10,000 in the Budget next week.
The allowance, which has been described as “a barrier to retirement saving” by the group, was reduced in 2017 from £10,000 to £4,000 by former chancellor Philip Hammond.
The idea was to limit the amount people were allowed to contribute to their pension once they had begun drawing down on their taxable pension, to avoid people “recycling” the 25 per cent tax-free allowance through employer contributions.
At the time, providers labelled the decision “ridiculous and unsustainable”.
It is hitting ordinary working people and risks storing up future problems by discouraging sensible retirement saving decisions.Tom Selby, AJ BellIn a letter sent to economic secretary to the Andrew Griffith MP, economic secretary to Treasury yesterday (March 1), the industry group said many over 55s have tapped into their retirement savings and are now restricted in their ability to rebuild these savings.
“When the limit was reduced from £10,000 to £4,000 in 2017, it was solely to curb the risk of income tax avoidance and the level was intended to be kept under regular review,” the letter, signed by Lang Cat director Tom McPhail, explained.
“It was specifically intended not to affect those who accessed their pensions due to financial pressures such as divorce or redundancy.
“However, the world is a very different place compared to 2017, with the UK suffering a cost-of-living crisis.”
The cap currently means that anyone who has accessed their pension flexibly and who now wants to return to work and build up further retirement savings, is capped at contributing no more than £4,000 a year or they will face a tax charge.
The industry group suggests that based on data from the City watchdog and the Office for National Statistics, the MPAA is “already a possible issue for hundreds of thousands of workers” over the age of 55.
“This is not good for them [the government], or for the economy, or for the Exchequer, which is potentially missing out on millions of pounds of income tax and National Insurance revenue from their employment,” the letter reads.
All the letter’s signatories, which include adviser platforms such as AJ Bell and Quilter, as well as professional body Pimfa, are also calling for a longer-term review into the impact of the MPAA.
AJ Bell previously wrote to the Treasury warning the MPAA risked undermining efforts to boost the economy in November last year.
The MPAA impact – an example
AJ Bell retirement policy head, Tom Selby, used the example of someone earning £55,000 who is automatically enrolled into a workplace pension at 8 per cent and has this contribution based on total salary.
“If they had flexibly accessed taxable income and triggered the MPAA, they would breach their annual allowance by £400, and therefore be subject to an annual allowance tax charge on the excess,” Selby explained.
“Even a saver earning £45,000 who is a member of a moderately generous scheme where 10 per cent of salary in total is contributed to their pension would exceed the MPAA by £500.
“The MPAA therefore isn’t just targeting the super-rich – far from it. It is hitting ordinary working people and risks storing up future problems by discouraging sensible retirement saving decisions.”
‘Pension tax trap’
Research by Canada Life published today (March 2) shows the MPAA has created a “pensions tax trap” for millions of over 55s.
The research found awareness of the MPAA is “very low”, with 62 per cent having never heard of it, only 35 per cent aware of it, and just 4 per cent fully in the know.
Of those who were aware of the MPAA, just 11 per cent were able to correctly identify what it is when tested.
Andrew Tully, technical director at Canada Life, said a small change to the rules could make a big difference and - echoing the letter - said it could even save the Treasury some money.
“The original impact assessment showed a net gain to the Treasury of around £75mn when they cut the allowance; but the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts,” said Tully.
“Our research shows a small adjustment to the rules could prevent an unfair tax charge being imposed on people it was never intended to hit in the first place.”
HM Treasury has been approached for comment.
ruby.hinchliffe@ft.com
