One in four pension savers over 55 contributed more than £4,000 to their pensions in 2020/21, fuelling concerns about the potential for ‘mass breaches’ of the Money Purchase Annual Allowance (MPAA) triggering unexpected tax charges.
This is the first time government figures show the proportion of savers in this age group who are making contributions that are theoretically above the MPAA limit.
Savers can put up to £40,000 a year into a pension, but once they have accessed their pension benefits, this triggers the restricted MPAA of £4,000. This is then applied for life.
Although the one-in-four contributing above this won’t have necessarily accessed their pension, evidence is growing that far more people aged 55 or over are tapping into these savings to help with the ongoing cost-of-living crisis.
Latest government figures show that £3.6bn of flexible pension withdrawals were made by over 500,000 people between 1 April and 30 June 2022 – a 23 per cent increase compared to the same period in 2021.
AJ Bell says given the scale of these withdrawals, and the numbers who are regularly making higher pension pensions, there were concerns that there could be ‘mass breaches’ of this MPAA limit in future.
AJ Bell wrote to the Treasury last year warning rising inflation risked forcing people to dip into their pensions earlier than planned. It has repeatedly called for a relaxation of the MPAA rules, arguing it should be raised to £10,000 and a review put in place to see if it is necessary at all. Previously there was a temporary relaxation of the MPAA limit during the initial Covid outbreak.
In response to AJ Bell’s letter, Treasury economic secretary Andrew Griffith refuses to budge on the MPAA, suggesting the measure was agreed with the industry.
AJ Bell head of retirement policy Tom Selby says: “There is mounting evidence that squeezed savers are being forced to turn to their pension pots to make ends meet during the cost-of-living crisis.
“Those who trigger the MPAA by accessing taxable income flexibly from their pension for the first time, the impact on their ability to rebuild their fund will be significant. The MPAA permanently slashes your annual allowance from £40,000 to just £4,000, while also removing your ability to carried forward unused allowances from the three previous tax years.”
He adds: “The Treasury itself admits around 25 per cent of pension savers aged 55 and over contributed above the MPAA in 2020/21. This, combined with the fact many will be forced to turn to their pension in the coming months and years to cover higher living costs, points to a real risk of mass breaches of the MPAA.
“If you exceed your annual allowance, you will be hit with an annual allowance tax charge which recoups the upfront tax relief you received
“Keeping this roadblock to saving for retirement in place isn’t just bad for individuals – it runs counter to stated Government policy. The Government is desperately trying to get older people back into the workforce, yet by setting such a low MPAA it is creating a disincentive by limiting their ability to build or rebuild their pension.”