Canada Life is calling for the chancellor to relax the pension annual allowance rules in the upcoming budget, saying current limits are creating a “tax trap” for millions of over 55s.
The insurer wants the money purchase annual allowance (MPAA), which is currently at £4,000 to revert to its pre-2017 level of £10,000. This reduced MPAA applies to those who have already accessed pension benefits. The normal annual allowance stands at £40,000.
Research by Canada Life indicates that the vast majority of people have not heard of the MPAA, or understand how it works. Its survey showed awareness was very low: 62 per cent had never heard of it; only 35 per cent were aware of it and just 4 per cent knew exactly what it involves.
Of those who were aware of the MPAA, just 11 per cent were able to correctly identify what it is when tested.
The research also found 27 per cent of those surveyed had accessed their DC pension since 2015. This bears out data from the Financial Conduct Authority and the ONS showing large numbers of over 55s have accessed their pensions, many ahead of their intended retirement date — potentially inadvertently triggering the MPAA which restricts future tax incentivised pension saving.
Canada Life has written to the Treasury, arguing for the MPAA to be put back up to its pre-2017 level of £10,000 in the upcoming Spring Budget 2023, and for the Treasury to review how it operates.
Canada Life technical director Andrew Tully says: “There’s a clear risk here, not just to high earners, but to people on average incomes, who have needed to tap into their retirement savings over the past few years. As they resume their working lives, automatically joining a workplace pension and recommencing saving for retirement, they unwittingly face being hit with a tax charge.
“A small change to the rules could make a big difference and could even save the Treasury some money. The original impact assessment showed a net gain to the Treasury of around £75 million when they cut the allowance; but the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts.
“Our research shows a small adjustment to the rules could prevent an unfair tax charge being imposed on people it was never intended to hit in the first place.”