In response to the coronanvirus crisis, 83% of financial advisers in the UK support a reform of the money purchase annual allowance (MPAA) system, according to research by AJ Bell.
Under the current rules, people can contribute to their pension either up to £40,000 ($49,290, €43,819) a year or 100% of their annual salary, and receive tax relief on that sum – this is also known as the annual allowance.
But once an individual starts taking money from a defined benefit (DB) pension, that sum significantly reduces to £4,000, which is known as the MPAA.
AJ Bell polled 292 advisers and found out that the majority (40%) want the money purchase annual allowance to be scrapped completely.
Almost a third (30%) would support an increase in the MPAA back to £10,000 – which was the limit during the 2015/16 and 2016/17 tax years, before being lowered to £4,000.
The call to action stems from the growing number of people tapping into their retirement pots to deal with the economic impact of lockdown.
MPAA ‘deeply unjust’
Tom Selby, senior analyst at AJ Bell, said: “Even before covid-19 hit, the MPAA felt like an unfair punishment for savers whose only crime was accessing taxable income from their pension pot.
“During this crisis, many more over-55s will be facing salary cuts or joblessness, while others will need to use their savings to help loved ones struggling to make ends meet.
“In such an environment, hitting people with a 90% annual allowance cut for taking even £1 of taxable income from their pension feels deeply unjust.
“While there are various easements to the MPAA the government could consider to help hard-pressed savers, the simplest would be to scrap it altogether.
“This could then mark the beginning of a radical pensions reform agenda, with the aim of simplifying the unnecessarily complex tax rules savers have to navigate and encouraging more people to save for their financial future,” Selby added.
