Pension rule slapping pensioners with ‘perverse’ tax penalty

Experts are urging the Government to consider making drastic changes to the Money Purchase Annual Allowance (MPAA). The way this pension rule is being implemented means that older people are missing out on a sizable amount of pension savings.

What is the MPAA?

The MPPA was introduced in 2015 and places a restriction on the amount someone can contribute to their retirement fund.

Specifically, early retirees can only place £4,000 a year into it if they have already accessed their pension pot.

This particular allowance is implemented effect once older people start to access their pension savings for the first time.

As it stands, the MPAA is set at £4,000 annually for each taxpayer however it has been as high as £10,000.

Anyone who crosses over the allowance threshold may have to pay a tax charge to the Government.

It should be noted that the annual amount someone can contribute to their pension before they start to access it is £40,000.

In the last week, reports have come out that Chancellor Jeremy Hunt is looking to entice over 55s back into the workplace who have taken early retirement.

Experts are recommending reform of the MPAA as a way to get older Britons back into work as it will allow them to save more for retirement while working.

Jon Greer, the head of retirement policy at Quilter, broke down why the MPAA is a piece of “perverse legislation” which is hurting peoples’ pensions.

He explained: “Jeremy Hunt this winter has called on older people who dropped out of the workforce in the pandemic to return to help ease chronic labour shortages and also help the UK out of this period of stagnation.

“However, perverse legislation disincentivises people returning to work if they have dipped into their pension.

“Under current legislation, any individual who accesses their pension flexibly triggers the MPAA, with the effect of reducing their annual allowance from £40,000 to £4,000 and thereby limiting their capacity to save into a pension once they return to work.

“Considering the huge sea change that happened to the world of work due to Covid it would make sense to relax the MPAA rules.”

However, the expert warned reform of the pension rule would not be the “silver bullet” needed to address the country’s ongoing labour issues.

Despite this, he acknowledged it could be a proper incenctive in getting people back into the workforce.

Mr Greer added: “It (MPAA) punishes those that do by imposing a punitive tax penalty on future annual pension contributions over £4,000 thus putting a huge barrier up to people returning to work.

“The MPAA should be restored to the pre-2017 level of £10,000 per annum. This would alleviate the risk of hitting the MPAA for most people with earnings of less than £100,000.

However, it might be worth overhauling the rules completely and implementing an approach similar in part to a pension commencement lump sum recycling pre-planning condition which appears to work effectively in practice.”

Jeremy Hunt is set to outline his Budget proposals next week on Wednesday, March 15, 2023.

Source: Read Full Article