01 June 2020
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Quilter has said it is calling on government to relax the Money Purchase Annual Allowance (MPAA) during the covid-19 pandemic. It has written to the Chancellor, Rishi Sunak, recommending a series of measures to avoid unfair pension tax penalties being imposed on people returning to work after this crisis.
Quilter says it is concerned those age over 55 may use their pension to cover a loss of earnings during the covid-19 pandemic. In order to prevent them suffering an unfair tax penalty when they return to work, it is calling on the government to:
- Waive MPAA triggers for the 2020-21 tax year so that people taking money from their pension during the crisis retain their normal annual allowance
- Restore the MPAA to £10,000 a year to ease annual allowance concerns for the majority of workers
- Consider replacing the MPAA with a general anti abuse approach once the pandemic subsides
The annual allowance is currently capped at £40,000 but a lower limit of £4,000 applies once someone aged over 55 accesses their pension, triggering the MPAA.
People age over 55 that see their earnings curtailed during this crisis may be tempted to withdraw from their pension."
Quilter's analysis of contribution rates shows that workers with earnings ordinarily of around £40,000-£50,000 and above can expect to be impacted in the future if they make a pension withdrawal. Some people may do this to top-up their income in the event they are furloughed or made redundant during the crisis.
When they return to work, Quilter warned, future annual pension contributions to money purchase arrangements over £4,000 would incur an annual allowance tax charge.
No MPPA trigger/annual allowance of £40,000:
|
|
Pensionable salary before lock-down |
|||
|
Contribution Rate |
£40,000 |
£50,000 |
£75,000 |
£100,000 |
|
8% |
£3,200 |
£4,000 |
£6,000 |
£8,000 |
|
10% |
£4,000 |
£5,000 |
£7,500 |
£10,000 |
|
12% |
£4,800 |
£6,000 |
£9,000 |
£12,000 |
MPAA triggers reduction to £4,000:
|
|
Pensionable salary following lock-down |
|||
|
Contribution Rate |
£40,000 |
£50,000 |
£75,000 |
£100,000 |
|
8% |
£3,200 |
£4,000 |
£6,000 |
£8,000 |
|
10% |
£4,000 |
£5,000 |
£7,500 |
£10,000 |
|
12% |
£4,800 |
£6,000 |
£9,000 |
£12,000 |
Auto-enrolment contribution rates are currently set at a minimum of 8% on ‘band earnings' of between £6,240-£50,000 a year. It means someone on a salary of £50,000 making even the bare minimum contribution would use more than 87% of their annual allowance once they trigger the MPAA. Those wanting to save more than the minimum would almost certainly breach their annual allowance.
Quilter's retirement planning experts are warning over 55s that triggering the MPPA now under the current rules could damage their long-term retirement prospects. They are urging those considering making their first pension income withdrawal during the crisis to speak to a financial adviser.
Jon Greer, Quilter head of retirement policy said: "With millions of people being furloughed or made redundant, a huge number of people could be unfairly penalised. Those that use their pension to top-up their income now will see their annual allowance cut by 90% for the rest of their career once they return to work.
"The covid-19 pandemic is damaging career prospects today, but we must limit the long-term impact on our prosperity. We are calling for the relaxation of the MPAA so that nobody is prevented from saving for a prosperous retirement due to this crisis."
Sting in the tail
Ian Browne, a retirement planning expert Quilter, recommended speaking to a financial adviser to avoid triggering the MPAA: "People age over 55 that see their earnings curtailed during this crisis may be tempted to withdraw from their pension.
"But that could come with a devastating sting in the tail if it isn't planned carefully. Individuals could trigger the MPAA by taking just £1 of flexible income from their pension. That means for the remainder of their career they will be subject to a massively reduced capacity for pension contributions.
"If you do need to supplement your income at the moment and you are considering using your pension it would be wise to speak to a financial adviser to consider the best way to do this. Firstly, think about using cash savings set aside for a rainy day. Secondly, consider using other savings like an Isa, which you can still top-up in future if you make a withdrawal now.
"Finally," Browne said, "if you do consider accessing your retirement savings, find out if you have a pension from which you could make the withdrawal under ‘small pots' payment rules, which would not trigger the MPAA."
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