The Association of British Insurers is calling for the Money Purchase Annual Allowance (MPAA) to be scrapped in the Budget so pension savers who have had to dip into their retirement savings during the pandemic are not penalised for paying it back when they can. It will 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. But if you wanted to pay back the money you have withdrawn, you risk missing out on pensions tax relief. This is because once pension savings have been accessed, the amount eligible for pensions tax relief decreases from a maximum of £40,000 to £4,000, known as the MPAA. The change in pensions tax relief is permanent, so older workers who withdraw from their pension will never get a maximum of £40,000 in pensions tax relief again. The MPAA applies if you start to take money flexibly from a defined contribution scheme. It is not applied if you take a tax-free lump sum or if you buy an annuity.
It does not take much to exceed the MPAA. People on the average salary for a 50-59* year old (£33,231) paying the minimum employer and employee contributions would only have to pay an extra £151 a month to their pension to exceed the MPAA and miss out on pensions tax relief for contributions above that amount. Someone earning the average salary for over 60s (£28,854) would have to pay an extra £183. It also means additional paperwork, including filling in a tax return and having to tell any other pension schemes that the MPAA applies to you.
The call to scrap the MPAA comes as latest figures from the ABI show that the number of people accessing their pension pots in December 2020 exceeded 2019 levels for the first time since the pandemic caused the UK to lock down in March last year. The number of pension pots accessed as a flexible income has increased 3% from 7,737 in December 2019 to 7,936 in December 2020. The number of people withdrawing all their pension in one lump sum increased by 4% from 11,076 to 11,501.**
ONS data on the labour market released on Tuesday shows the number of people unemployed aged 50 – 64 has increased by over 43% since the start of the pandemic from 276,000 to 395,000 people.*** The unemployment rate is at its highest level since 2014 (4.1%), this could lead to further increases in people accessing their pension early.
Yvonne Braun, Director of Policy for Long-Term Savings and Protection at the Association of British Insurers 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.”
Notes for Editors
*The average salary for 50-59 year olds and 60+ year olds is taken from the ONS Annual Survey of Hours and Earnings. Workings for the additional contributions below to exceed the Money Purchase Annual Allowance of £4,000.
Extra amount after minimum pension contributions = (MPAA/12months) – ((automatic enrolment minimum contribution requirement of 8%/100)*(average salary – automatic enrolment lower limit of £6240)/12 months)
50 – 59 year old average salary £33,231 pay and extra £153 a month to exceed the MPAA
Amount to pay extra a month after minimum employer and employee contributions of 8% to exceed MPAA = (4000/12) – ((8/100)*(33231-6240))/12) = £153.39
60+ average salary £28,854 pay an extra £183 a month to exceed MPAA.
Amount to pay extra a month after minimum employer and employee contributions of 8% to exceed MPAA = (4000/12) – ((8/100)*(28854-6240))/12) = £182.57
The calculations are indicative only and that individual tax advice should be taken to reflect all the relevant facts before any action is taken.
** Pensions withdrawal data available upon request.
***Unemployment figures taken from ONS Employment, unemployment and economic inactivity by age group (seasonally adjusted)
The MPAA exists to prevent people deliberately taking tax-free cash from a pension and then getting tax relief again by putting it back in. But the ABI would like to see this ‘recycling’ prevented using existing laws, which means that a payment is unauthorised if it is intended to exploit the system.
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