Retirement specialist Just Group has urged the government to raise the Money Purchase Annual Allowance to encourage older people back into work and limit the number of people facing unexpected tax charges.
Analysis by Just Group found that the MPAA, which was £10,000 when it was first introduced in 2015, would be worth £12,480 if adjusted for rising prices. However, the allowance was cut to £4,000 in 2017 and has remained frozen, despite rampant inflation over the past year. In real terms, Just Group said this means the MPAA is £8,480 less than when it first came into force.
The group warned that the failure of the government to adjust the limit in line with inflation means thousands of savers aged 55+ who have taken a flexible payment from their pension are “hamstrung from saving for retirement” and risk unexpected tax bills.
According to Stephen Lowe, group communications director at Just Group, more than 2 million people have taken a flexible payment from a pension since 2015 and thousands still saving into a pension are likely to breach the MPAA, although many will be unaware of the rules.
“The MPAA is designed to stop people recycling cash back into pensions to double-claim tax relief. Back in 2015 with a £10,000 limit, it would have affected relatively few. Reducing it to £4,000 and freezing it is capturing thousands of workers each year.
“The cost of living crisis has seen many people aged over 55 use their pension savings to help them through a financially difficult patch. On top of that, wage growth has picked up resulting in higher pension savings. A low MPAA and higher pensions savings see many people either hamstrung in how much they can save or subject to unexpected tax charges.”
Lowe continued: “We would like to see the Chancellor of the Exchequer increase the MPAA in the Spring Budget because the government needs to encourage more of those aged 55+ back into the workforce.”
Lowe said that not all withdrawals from pensions are flexible withdrawals, potentially adding to the confusion. Those using their entitlement to take up to 25% tax free cash will not be subject to the MPAA, along with those withdrawing small pension pots worth up to £10,000 or using their retirement fund to buy a guaranteed income for life from a pension annuity.
“The rules are complicated which is why we recommend people take the free, independent and impartial guidance from Pension Wise and, ideally, regulated advice from a professional adviser. That should help people understand their responsibilities and the consequences of decisions to take pension funds early. It’s not just unexpected tax charges but also the fact that pensions are a valuable perk so you really don’t want to miss out on tax-relief,” he added.
