The Government is being urged to increase the money purchase annual allowance (MPAA) to £10,000, with critics saying that savers could be too easily caught by the current limit of £4,000 when accessing their pension.
Recent research suggests that an individual earning £30,000 who, alongside their employer, is contributing sums equivalent to 14 per cent of their salary to a money purchase pension, would be caught by the MPAA if they enter drawdown.
Meanwhile, higher earners are even more likely to be caught, even if they are paying far lower contribution rates. For example, someone earning £50,000 with a shared employer and employee contribution rate of just eight per cent of total earnings would be caught out.
The Government introduced the MPAA on 6 April 2015, which was the same year as the pension freedoms, in a bid to avoid the ‘recycling’ of pension funds. The original limit was £10,000, but this was reduced to £4,000 for the 2017-18 tax year, putting a cap on the amount an individual, who has already begun drawing on their pension, can pay back into their retirement pot in a given year without incurring a tax charge.
Critics are now calling for the limit to be raised back to £10,000 because separate research has shown that almost half of UK workers aged 50 or over and earning £20,000 or more want to “transition into retirement”, rather than having the “cliff-edge” event of one day in full employment and the next day retired.
As one commentator remarked, barriers to contributing above £4,000 a year in later working life could leave individuals thousands of pounds out of pocket, through having to turn down valuable employer pension contributions.
He added that the little-known cap is undermining the widely applauded pension freedoms and auto-enrolment, and this could even mean that some opt-out of being automatically enrolled into a workplace pension because their combined employer and individual contributions are above £4,000.