Accessing pension to fund a Covid cash crisis could see even median earners hit with tax penalties for contributing to their pension, Aegon has warned.
Individuals earning £30,000 per year who have accessed their pension flexibly will trigger the Money Purchase Annual (MPAA) with pension contribution rates over 13.4 per cent, with someone earning £50,000 per year hit if they make an 8 per cent contribution.
Aegon is calling for the MPAA limit to increase from £4,000 to at least £10,000 to prevent further risks to retirement plans
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 defined contribution pension and limits the amount of future annual contributions to a pension from £40,000 to £4,000 if incurring a tax penalty is to be avoided.
Former Chancellor of the Exchequer Philip Hammond introduced the MPAA to stop leakage of tax through individuals potentially paying part of their salary into their pension to avoid tax and national insurance contributions, and then withdrawing it at a later date. The chancellor prior to Hammond, George Osborne, unveiled pension freedoms in the weeks before the 2015 General Election, without any penalties for individuals who abused the system by flushing salary through their pension.
Currently, individuals can access their private pension from age 55, although the ‘normal minimum access age’ is increasing to 57 in 2028.
While some schemes base contributions on total earnings, others are based on qualifying earnings, or ‘band’ earnings, between £6,240 and £50,270 (for 2021/22). For these schemes, individuals earning £30,000 per year will reach the MPAA limit with a pension contribution of 16.9 per cent. This falls to 9.2 per cent for someone earning £50,000 per year.
Aegon pensions director Steven Cameron says: “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 (MPAA), which limits any future pension contributions to just £4,000 per year, one tenth of the standard £40,000 limit.
“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.
“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 effected 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.”