Industry coalition calls for urgent MPAA reform

Industry letter to the Treasury calls for MPAA to be increased from £4,000 to £10,000

Jonathan Stapleton
clock • 3 min read
The letter was organised by Lang Cat director of public affairs Tom McPhail
Image:

The letter was organised by Lang Cat director of public affairs Tom McPhail

Some 17 industry firms and organisation have sent a letter to HM Treasury calling for urgent reform of the Money Purchase Annual Allowance (MPAA).

The signatories - which include Aegon, AJ Bell, the Association of British Insurers, Hargreaves Lansdown, the Pensions and Lifetime Savings Association (PLSA), Redington and The Investing and Saving Alliance (TISA) - calls for the MPAA to be increased from £4,000 to £10,000.

It also calls for a longer-term review of the impact of the MPAA to explore the effectiveness of the current rule and to discuss possible improvements to its operation and impact.

 

The letter, which was addressed to economic secretary to the Treasury Andrew Griffith said that when the limit was reduced from £10,000 to £4,000 in 2017, it was solely to curb the risk of income tax avoidance and the level was intended to be kept under regular review - adding the rule was specifically intended not to affect those who accessed their pensions due to financial pressures such as divorce or redundancy.

However, it added the world was now a very different place compared to 2017, with the UK suffering a cost-of-living crisis - adding that many over 55s have tapped into their retirement savings and were now restricted in their ability to rebuild these savings.

Commenting on the letter, Hargreaves Lansdown head of retirement analysis Helen Morrissey said: "We have long called for reform of the MPAA but, as the government looks to encourage older people to return to work, the need to do this is increasingly urgent.

"Many people left the workforce during the pandemic and have yet to return with many older workers accessing their pensions to top up their income. Many will wish to rebuild their pensions as they re-enter the workforce and the MPAA currently acts as a barrier to them doing so."

She added: "Increasing the level to £10,000, as set out in the letter, is a good first measure but longer term we need a wider look at pension tax relief and the MPAA's role within it. We have consistently called for the replacement of the MPAA with anti-recycling rules, which would treat contributions paid with the intent to recycle as an annual allowance excess and be taxed accordingly."

AJ Bell head of retirement policy Tom Selby added: "If the government wants to show it is serious about encouraging over 50s back into the workforce, it needs to address the swingeing pension saving penalty imposed on hundreds of thousands of people by the ‘money purchase annual allowance'.

"At the moment, anyone who flexibly accesses taxable income from their retirement pot has their annual allowance slashed from £40,000 to just £4,000. They also lose the ability to ‘carry forward' up to three years of unused annual allowances from the three previous tax years.

"Setting the MPAA at such a low level means even average earners making relatively moderate retirement saving contributions risk being hit with a tax charge."

Anti-recycling

Hargreaves Lansdown also called for the MPAA to be replaced with anti-recycling rules.

Morrissey said: "A money purchase pension contribution would be treated as recycled if the contribution paid is significantly larger than it otherwise would be because of the pension withdrawal.

"Two exceptions apply - where the contribution doesn't exceed the MPAA or if the contribution does not exceed 30% of the withdrawal. Previous contribution history could also be used to determine whether the contribution is deemed significantly larger. Only those who had flexibly accessed their pension, and were then contributing more than the MPAA, would be affected by these changes."

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