New research shows the Money Purchase Annual Allowance (MPAA) has created a pensions tax trap for millions of over 55s. Awareness of the MPAA is very low: 62% had never heard of it; only 35% were aware of it and just 4% knew exactly what it involves. Of those who were aware of the MPAA, just 11% were able to correctly identify what it is when tested.
The research also found 27% of those surveyed had accessed their DC pension since 2015. This bears out data from elsewhere (FCA and ONS) showing large numbers of over 55s have accessed their pensions, many ahead of their intended retirement date, potentially inadvertently triggering the MPAA which restricts future tax incentivised pension saving.
Complexity and the barrier to employment
When asked about pension saving rules, three quarters (74%) of over 55s with a DC pension agreed the rules around accessing pensions are too complicated. 44% agreed the MPAA could act as a barrier to making further pension contributions and 44% also agreed it could act as a barrier to retirees returning to the workplace.
Canada Life has written to the Treasury, arguing for the MPAA to be put back up to its pre-2017 level of £10,000 in the upcoming Spring Budget 2023, and for the Treasury to review how it operates.
Andrew Tully, technical Director, Canada Life comments: “There’s a clear risk here, not just to high earners, but to people on average incomes, who have needed to tap into their retirement savings over the past few years. As they resume their working lives, automatically joining a workplace pension and recommencing saving for retirement, they unwittingly face being hit with a tax charge.
“A small change to the rules could make a big difference and could even save the Treasury some money. The original impact assessment showed a net gain to the Treasury of around £75 million when they cut the allowance; but the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts.
“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.”
Changing the rules
The MPAA was introduced in 2015 as part of the pension freedom changes; it is necessary to stop over 55s getting their salary paid directly into their pension, drawing the money out using the freedoms (with 25% taken tax free) and endlessly repeating the process. So once someone has used the pension freedoms to flexibly access their pension, their allowance for future contributions is cut from the usual £40,000; initially the MPAA was set at £10,000.
However, in 2017, the Treasury reduced the MPAA from £10,000 to £4,000. Canada Life is campaigning for the Treasury to reverse this cut in the allowance, as well as looking at possible changes to the rule to make it more light touch.
Budget submission
If you’d like a copy of Canada Life’s detailed Budget submission setting out the arguments in more detail, you can access a copy here
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