Freeze in MPAA set to ‘squeeze’ pension savers

A freeze in the money purchase annual allowance (MPAA) along with changing tax thresholds is set to “squeeze” many more basic rate taxpayers, according to Just Group.

The retirement specialist has called for stronger support for pension savers who are thinking of taking taxable cash from a pension while still continuing to work and save into an employer’s pension scheme.

Analysis by Just Group suggested the freeze in the MPAA at £4,000, combined with new tax thresholds for 2020-21, means more employees could start to feel the squeeze due to pension contributions that exceed the allowance – and this would include those contributing the minimum 8% of salary to a workplace pension.

In 2020-21 the marginal rate of income tax was 20% on earnings up to £50,000 and someone earning that amount making an 8% pension input would be within the £4,000 MPAA limit.

For 2021-22, however, Just Group highlighted that the 20% tax threshold is £50,270 and someone earning that amount making the 8% contribution would have an input of £4,021, just above the £4,000 limit. Analysis revealed that the scheme member would face an annual allowance charge on the £21 excess, in effect clawing back tax relief and reducing the tax efficiency of saving into the pension.

“Nearly nine in 10 (88%) eligible employees aged between 50 and State Pension age are automatically enrolled into workplace pensions, a number that rose by 26 percentage points between 2012 and 2019,” commented group communications director at Just Group, Stephen Lowe.

“The FCA has described taking pension cash early as ‘the new norm’ but taking taxable payments while still working can make pension saving much less attractive, impacting not just the highly paid but those on more modest salaries still trying to build their retirement funds.

“The 8% figure is relevant because it reflects the current minimum contribution that must be made to workplace pensions under the automatic enrolment rules. Technically the 8% is based on a ‘qualifying earnings’ band that starts at £6,240 but employers are often more generous and pay it on the whole salary or will contribute at a higher rate than the minimum.

“People currently contributing under the £4,000 limit could easily be caught in the future as they receive pay rises, job promotions or bonuses, or where they or their employer increase the amount being contributed to the pension, perhaps trying to maximise their funds in the run-up to retirement.”

Lowe suggested that policymakers should not expect most people to be aware of or understand the complexities and consequences of the rules which impact their ability to keep saving into a pension, and said that stronger support for pension savers is required.

He added: “The need to increase guidance usage is acknowledged by the government and the FCA but solutions presented so far have been too tame to make the transformation in numbers required.

“A more effective answer would be to automatically enrol people into guidance from age 50, bringing the same kind of support provided to pension savers to those starting to draw out their cash.”

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