Middle income earners 'at risk' of breaching MPAA limit

The Money Purchase Annual Allowance (MPAA) limit should increase from £4,000 to £10,000 to stop middle income earners from falling victim to the charge in the wake of the pandemic, according to Aegon.

The retirement solutions provider explained that over-55s who faced financial difficulties during the pandemic period were likely to have dipped into their pensions for short-term relief but would now find their contributions impeded by the “little-known” MPAA limit.

Additionally, Aegon said the MPAA limit had “come under pressure with changing retirement patterns”, noting that “an increasing number of people are accessing their pension flexibly to support a gradual transition to retirement”.

The limit applies to anyone who has accessed their defined contribution pension savings and would leave them with a tax penalty if their future contributions exceed the limit.

Pointing out how easy it would be to fall afoul of this limit, Aegon noted that a contribution rate of 13.4 per cent for an individual earning £30,000 per year and a contribution rate of 8 per cent for somebody earning £50,000 would both trigger the MPAA.

Aegon added that, when determining if savers were in danger of triggering MPAA, it was worth noting that some schemes base contributions on total earnings, whereas others base them on qualifying earnings or band earnings.

Aegon pensions director, Steven Cameron, commented: “The last 18 months have seen many individuals face difficult decisions as the coronavirus has left a damaging toll on personal finances. Those over 55 who have lost their job or faced reduced wages, may have been tempted to dip into their pension to access financial support during the crisis.

“But the ability to access pension savings flexibly comes with a sting in the tail as it triggers the little-known MPAA, which limits any future pension contributions to just £4,000 per year, one tenth of the standard £40,000 limit.”

Cameron concluded: “The pandemic has highlighted the need for greater flexibility and we’re calling on the government to increase the MPAA to ensure people who have been adversely effected by the crisis are not left disadvantaged in their ability to rebuild their pension savings.

“Increasing the MPAA limit to at least £10,000 would go some way to help those individuals whose retirement plans have been thrown into disarray.”

It is not the first time the government has faced calls to loosen or scrap the MPAA this year, with the Association of British Insurers arguing in February that binning the MPAA could help to incentivise retirement saving for older workers and improve their financial resilience.

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