Calls for Chancellor to increase MPAA to £10,000

The figure sparked concern as the rising cost of living has meant that some retirees have dipped into pension pots early to pay bills and debts.

But the Money Purchase Annual Allowance (MPAA), a special restriction on the amount you can pay in to your pension and still receive tax relief, kicks in after you draw from pension and could cost unaware retirees thousands in tax.

Everyone has an annual allowance which restricts how much you can pay into your pension pot each year. The amount savers can put into a pension tax-free is capped at £40,000 a year.

Read more: Skills shortages are damaging Britain’s ’fragile’ economy 

However, once you’ve started to draw your pension, this annual allowance is replaced by the MPAA, which caps your tax-free allowance at £4,000, meaning people will lose thousands when trying to build up their pots again.

AJ Bell wrote to the Treasury last year warning rising inflation risked forcing people to dip into their pensions earlier than planned.

The letter came after official statistics revealed £3.6 billion of flexible pension withdrawals were made by over 500,000 people between 1 April and 30 June 2022 – a 23% increase compared to the same period in 2021.

In response to AJ Bell’s letter, Treasury economic secretary Andrew Griffith refused to budge on the MPAA, suggesting the measure was agreed with the industry.

Those who flexibly access taxable income from their retirement pot will trigger the MPAA, reducing their annual allowance from £40,000 to just £4,000.

Read more: Women face ‘whopping pension gap’, says TUC

AJ Bell has called on Chancellor Jeremy Hunt to increase the MPAA to £10,000 at the Budget adding it would incentivise older workers to rejoin the labour force.

Tom Selby, head of retirement policy at AJ Bell, said: “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. 

“While we don’t know exactly what has driven this behaviour, the most likely culprit is spiralling inflation. With millions of families struggling to pay the bills at the moment, for many turning to their hard-earned pensions will feel like the only option. There will also inevitably be lots of parents or grandparents who are taking some income from their pensions to help younger generations get by.

Read more: FCA details plans to boost non-workplace pension customers

“For those who trigger the money purchase annual allowance (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.”

Selby said that the figures fuel concerns over the potential for mass breaches of the MPAA.

“The Treasury itself admits around 25% of pension savers aged 55 and over contributed above the MPAA in 2020/21,” he said. “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.

Read more: Barclays bankers bonuses cut after decline in profit

“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.

“As a minimum, the Chancellor should increase the MPAA to £10,000, the level it was originally established at. However, over the medium-term the Treasury should consider whether the MPAA is necessary at all.” 

If you’re unsure about how this might impact you and want some help, you could speak to Pension Wise.