Britain’s biggest pension and investment companies have called on Jeremy Hunt to use the upcoming Budget to reform tax rules they say penalise over-50s returning to work.
An unprecedented coalition of financial giants, including stockbroker Hargreaves Lansdown and the Association of British Insurers, a powerful City lobby group, have urged the Chancellor to increase the “money purchase annual allowance” limit.
The MPAA restricts tax-free saving into a pension once a person has already started to draw an income from it. Workers can normally save up to £40,000 into their pension tax-free, but when the MPAA is triggered this drops to £4,000.
A letter to Guy Opperman, Minister of State for Employment, and to senior Treasury ministers Andrew Griffith and Victoria Atkins, called on the Government to review the rule in the Budget on March 15.
The letter said: “It is clear the MPAA is already a possible issue for hundreds of thousands of workers over the age of 55. They face an older worker penalty that prevents them from saving for retirement and may discourage them from seeking out employment.
“This is not good for them, or for the economy, or for the Exchequer, which is potentially missing out on millions of pounds of income tax and National Insurance revenue from their employment.”
The MPAA limit restricts as many as one million people of working age, according to estimates from the pension provider Canada Life.
Robert Yuille, of the ABI, said: “This rule penalises people who want to go back to work and rebuild their savings. It was never designed for that purpose – it was meant to stop people from recycling their pension savings. This is when people withdraw money from their pensions, then put the cash back in again and regain tax relief.
“When the £10,000 MPAA limit was first introduced, it affected a small number of people. But reducing it to £4,000 in 2017, and not changing it since, means that more people than intended are affected.”
The pension firms have called on the Government to restore the MPAA back to £10,000, the original level at which it was introduced in 2012.
Lindsey Rix, head of the pension provider Canada Life UK, said: “Any modest cost to the Exchequer from the higher allowance could be more than offset through increased tax revenues. Even a modest boost to employment would result in higher income tax revenues, as well as tax revenues such as higher VAT from increased spending.”
A worker in their 50s in a high quality “defined contribution” pension scheme would only need to earn above £26,667 to fall foul of the MPAA, Canada Life estimated.
Tom Selby, of the broker AJ Bell, said: “Many over 55s will be under pressure not just to pay their own bills but to provide financial help to relatives of both younger and older generations. Punishing those who access their retirement pot flexibly with such a swingeing cut to their annual allowance is deeply unfair and will leave many hamstrung when looking to rebuild their pension after this crisis.”
The number of retirement pots accessed for the first time rose by 18pc in the 2021-22 tax year compared with the year prior, from 596,080 to 705,666, according to the latest figures from the Financial Conduct Authority, the City watchdog.
Mr Selby added: “HMRC data, meanwhile, tells us £3.6 billion of flexible pension withdrawals were made between April 1 and June 30 2022 – a 23pc increase compared to the same period in 2021. This is likely to be a response to the rising cost of living.”
While the Government plans a push to get over-50s back into the workforce, official data suggests that the main driver behind economic inactivity is long-term health issues.
NHS waiting lists reached a record seven million in England last year. Experts have suggested that queues could grow for several more months, peaking late this year.
A spokesman for the Treasury said that the Government was committed to supporting savers and had a range of incentives to encourage people to invest for their retirement.
He said: “The money purchase allowance affects around 25 pc of occupational defined contribution savers aged 55 and over. The cap is designed to stop pensioners – who have already drawn down some or all of their pension – from receiving double tax relief by funding ongoing savings with their existing pension pots, which have often accrued without any taxation.”
While the Chancellor campaigns to get older people back to work, early signs of a wave of “unretirement” have emerged. The number of 50 to 64-year-olds preparing to get back to work rose in the final three months of 2022, according to analysis of official data by the Institute for Fiscal Studies, a think tank.
At the end of last year one in 20 economically inactive 50 to 64-year-olds said they would start looking for a job in the next three months, representing 5.17pc of the total. That marked a rise from the 3.84pc who said they would come back to work in the year to September, and above the pre-pandemic average of 4.48pc.