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ABI calls for abolition of MPAA

1 March 2021

The Association of British Insurers has urged the Government to scrap the Money Purchase Annual Allowance in its upcoming Budget.

The ABI said this was to prevent savers who have had to dip into their retirement savings during the pandemic from being penalised for paying it back when they can.

The industry body said removing the MPAA would also incentivise older workers to continue to save into their pension, improving their financial resilience.

The pension freedoms introduced in 2015 allow anyone over 55 years old to access their pension flexibly, however those who choose to pay back the money they have withdrawn risk missing out on pensions tax relief as a result of the MPAA. Under current MPAA rules, the amount eligible for pensions tax relief falls from a maximum of £40,000 to just £4,000.

The ABI warned that it does not take much to exceed the MPAA, with those aged between 50 and 59 on an average salary only needing to pay an extra £151 a month to their pension to exceed the MPAA and miss out on pension tax relief for contributions above that amount.

The ABI’s call to the Chancellor comes as its research shows that the number of people accessing their pension pots in December 2020 exceeded 2019 levels for the first time since the pandemic took hold in March last year. The number of pension pots accessed flexibly increased from 7,737 in December  2019 to 7,936 last December.

Meanwhile, the number of people unemployed between 50-64 years of age has increased by over 43% since the start of pandemic, marking its highest levels since 2014.

Yvonne Braun, director of policy for long-term savings and protection, 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. Our data suggests that pension withdrawals have not yet substantially increased but the continued uncertainty and insecure job market could mean more people dipping into their retirement savings to get by.

“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.”

Industry experts came out in support of the ABI and urged the Chancellor to rethink the “archaic rule.”

Tom Selby, senior analyst at AJ Bell, commented: “Even before the pandemic struck, slashing someone’s pensions annual allowance by 90% 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. Savers withdrew £9.4 billion flexibly from their pensions in 2020. Within that number there will inevitably be people who have been forced to dip into their pension as a result of Coronavirus. This behaviour could range from someone replacing lost salary from employment to helping a younger relative pay their bills or older relative cover care costs.

“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.”

Ian Browne, pensions expert, Quilter, said: “As with any Budget, the Chancellor will be keen to pull a rabbit from his hat and announce a headline grabbing policy change that boosts his personal profile. And while it’s hard to find an issue less glamorous than pensions and the Money Purchase Annual Allowance, it is one that could make a big difference to people in the difficult economic environment ahead if the government decide to scrap the archaic rule.

“Nobody should be punished for a loss of earnings during the pandemic through no fault of their own. The MPAA is a severe long-term penalty for a short-term issue, and one which fundamentally goes against the principles of pension freedoms.”

Browne said that as a solution, the Government should either abolish the MPPA trigger or restore it back to the pre-2017 level of £10,000 per year.

Browne added: “Ultimately, the government should explore whether a general anti-abuse approach could work better than the rigid, strict approach currently employed.”

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