The Money Purchase Annual Allowance (MPAA) should be increased from £4,000 to at least £10,000 to prevent further risks to over-55s retirement plans, says Aegon.
With many people experiencing financial difficulty as a result of the Covid-19 pandemic, Aegon highlighted that many middle-income individuals risk falling victim to the “little known” pension rule if they choose to access their retirement fund.
According to the pension specialist, individuals earning £30,00 per year who have accessed their pension flexibly will trigger the MPAA with pension contribution rates over 13.4%. This figure falls to 8% for someone earning £50,000 per year.
The MPAA was introduced alongside the Pension Freedoms to prevent people drawing money from a pension and recycling it back into a pension scheme to claim further tax relief on these contributions. It is triggered when individuals flexibly access their pension and limits the amount of future annual contributions to a pension from £40,000 to £4,000.
Steven Cameron, pensions director at Aegon, said: “The last 18 months have seen many individuals face difficult decisions as the coronavirus has left a damaging toll on personal finances.
“Those over 55 who have lost their job or faced reduced wages, may have been tempted to dip into their pension to access financial support during the crisis. But the ability to access pension savings flexibly comes with a sting in the tail as it triggers the little-known money purchase annual allowance.
“Aegon’s analysis shows that even those on moderate incomes are at risk of breaching the MPAA. Someone earning £30,000 per year and paying pension contributions on their full salary will breach the limit with monthly contributions over 13.4%, and this includes any contributions from their employer. Savers, therefore, need to have their eyes wide open when accessing their pension to avoid devastating consequences on future retirement plans.”
Cameron added: “The pandemic has highlighted the need for greater flexibility and we’re calling on the Government to increase the MPAA to ensure people who have been adversely affected by the crisis are not left disadvantaged in their ability to rebuild their pension savings. Increasing the MPAA limit to at least £10,000 would go some way to help those individuals whose retirement plans have been thrown into disarray.”
