Pressure is mounting on the Treasury to tackle a pension tax penalty which can slash the ‘annual allowance’ for workers who return to the labour market from £40,000 to just £4,000.
A joint industry letter, signed by AJ Bell and 16 other financial services organisations, urges the government to increase the ‘money purchase annual allowance’ (MPAA) from £4,000 to £10,000 in the March Budget. It also calls for alonger-term review of the impact of the MPAA.
The letter (attached), which has been organised by Lang Cat director of public affairs, Tom McPhail, has been sent to ministers at the Treasury and the DWP. AJ Bell previously wrote to the Treasury warning the MPAA risked undermining efforts to boost the economy in November last year.
Tom Selby, head of retirement policy at AJBell, comments: “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.
“This acts as a clear disincentive for people who want to return to work and keep saving for retirement. It also risks hindering those who have accessed their pension during a period of financial distress from rebuilding their pot afterwards.
“Increasing the MPAA back to £10,000, the level at which it was originally introduced in 2015, feels like a no-brainer for Jeremy Hunt at this month’s Budget. Over the longer-term, the government needs to consider alternative mechanisms to control the risk of people ‘recycling’ tax-free cash.”