MPAA has created a ‘tax trap’ – Canada Life

The money purchase annual allowance (MPAA) has created a pensions “tax trap” for millions of over-55s, according to new research from Canada Life.

Awareness of the MPAA is very low, according to the findings, with 62% of people having never heard of it, only 35% aware of it, and just 4% knowing exactly what it involves.

Of those who were aware of the MPAA, just 11% said they were able to correctly identify it when tested.

Canada Life’s research also found that 27% of those surveyed had accessed their defined contribution (DC) pension since 2015. This bears out data from the Financial Conduct Authority (FCA) and the Office for National Statistics (ONS) showing large numbers of over-55s have accessed their pensions, many ahead of their intended retirement date, potentially inadvertently triggering the MPAA which restricts future tax incentivised pension saving.

When asked about pension saving rules, three quarters (74%) of over-55s with a DC pension agreed the rules around accessing pensions are too complicated. Another 44% agreed the MPAA  could act as a barrier to making further pension contributions, while 44% also agreed it could act as a barrier to retirees  returning to the workplace.

Canada Life has written to the Treasury, arguing for the MPAA to be put back up to its pre-2017 level of £10,000 in the upcoming Spring Budget 2023, and for the Treasury to review how it operates.

“There’s a clear risk here, not just to high earners, but to people on average incomes, who have needed to tap into their retirement savings over the past few years,” said Canada Life technical Director, Andrew Tully. “As they resume their working lives, automatically joining a workplace pension and recommencing saving for retirement, they unwittingly face being hit with a tax charge.

“A small change to the rules could make a big difference and could even save the Treasury some money. The original impact assessment showed a net gain to the Treasury of around £75m when they cut the allowance, but the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts.

“Our research shows a small adjustment to the rules could prevent an unfair tax charge being imposed on people it was never intended to hit in the first place.”

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