Chancellor urged to change tax system which could harm those nearing retirement age
Over-55s could face unfair tax penalties once they return to work after the coronavirus crisis, warns wealth management firm Quilter.
Workers who may have accessed their pension to cover loss of earnings during the coronavirus pandemic may incur pension tax charges as a result of the Money Purchase Annual Allowance (MPAA).
The MPAA restricts how much money you can pay into a defined contribution pension scheme without incurring tax once you have started to withdraw money from it.
While the MPAA is currently capped at £40,000, there is a lower limit of £4,000 which applies once someone aged over 55 accesses their pension.
This means that employees with earnings of £40,0000 to £50,000 who have started to withdraw income from their pensions, could expect to pay tax if their annual pension contributions are over £4,000 when they return to work.
What is the Money Purchase Allowance Scheme?
The MPAA was launched in 2015 and introduced a lower annual allowance for people started to draw income from their pension pots.
It was designed to discourage individuals from abusing the new pension freedom rules to avoid paying tax or National Insurance Contributions.
The MPAA lower limit was originally set to £10,000, however this allowance was cut to £4,000 in 2017.
Calls for government change
Quilter is calling on the government to relax the MPAA .
In a letter to the Chancellor, Rishi Sunak, Quilter recommends that the government waive MPAA triggers for the 20/21 tax year so that people taking money from their pension during the crisis retain their normal annual allowance.
It also suggests increasing the MPAA back to £10,000 a year to avoid savers being hit by unfair charges.
Finally, Quilter wants the government to eventually scrap the MPAA and replace it with another system to prevent people abusing their retirement pots.
Jon Greer, head of retirement policy, 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."
Getting professional financial advice
Experts are urging those considering making their first pension income withdrawal during the coronavirus crisis to seek independent professional financial advice.
Ian Browne, Quilter retirement planning expert, says: “People aged over 55 that see their earnings curtailed during this crisis may be tempted to withdraw from their pension.
“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."