Call for pension rule to be changed to prevent unfair penalty for furloughed workers

There are fears that those over the age of 55 may be caught out by a pension rule when accessing their retirement savings during the Covid-19 pandemic. 

Wealth manager Quilter has penned a letter to chancellor Rishi Sunak that calls on the government to relax a pension rule that will have consequences for some furloughed workers that have dipped into their pensions during the coronavirus crisis.

Quilter is concerned those in this position will be negatively impacted by the money purchase annual allowance (MPAA). The MPAA, which is set at £4,000 per year, is the amount savers can pay into a pension each tax year (and benefit from tax relief) once they have started taking a pension.

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The MPAA is a heavily reduced limit on the amount that can be put into a pension while benefiting from tax relief. It is triggered when an individual takes their first taxable cash out of a ‘pot of money pension’ as opposed to a salary-related pension. The pension rule is designed to limit pension recycling, whereby pension withdrawals are paid back into a pension and tax relief is received for a second time.

But, there are some circumstances when the allowance is not triggered, such as if an individual only takes tax-free cash (25% of the pension pot) and leaves the rest untouched in a flexible drawdown account. Or, alternatively, takes the tax-free cash and buys a lifetime annuity.

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In addition, the MPPA is not triggered for small pension pots that are valued at less than £10,000.

Nonetheless, Quilter is concerned those aged over 55 may be caught out by the MPPA when accessing their pension to cover a loss of earnings during the Covid-19 pandemic. 

In order to prevent them suffering a tax penalty when they return to work, Quilter is calling on the government to waive MPAA triggers for the 2020/2021 tax year so that people taking money from their pension during the crisis retain their normal annual allowance. It is also calling on the government to restore the MPAA to £10,000 (it was cut to £4,000 in April 2017) a year to ease annual allowance concerns for the majority of workers.

Quilter’s analysis of contribution rates shows that workers with earnings of around £40,000-£50,000 and above can expect to be impacted in the future if they make a pension withdrawal. Those in this position that breach the £4,000 annual allowance will pay tax on the excess, which is equivalent to the amount of tax relief you would have benefited from.

Pension tables Quilter research

Jon Greer, head of retirement policy at Quilter, says: “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.”


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