But there is also a lack of HMRC data about how many people are affected as the tax authority is not able to provide figures on over payments as they are grouped with the usual annual allowance limit numbers. A freedom of information request by pension giant Aegon found that HMRC had no information on how many pension savers were exposed to MPAA.
Aegon is calling for HMRC record keeping to be enhanced to show the extent of harm being caused, while it would also like to see a government policy review and a potential increase in the MPAA limit from £4,000 to £10,000.
HMRC said: ‘Information on money purchase annual allowance (MPAA) breaches cannot be separated from the annual allowance on the self assessment form. This is because in form SA101, on page 10, there is only one box (box 10) which records the amount by which pension savings exceed an individual’s MPAA, the annual allowance or tapered annual allowance. The actual annual allowancee they face is not required.’
Those who fall foul of the MPAA rules are pension savers, aged over 55, who have taken advantage of the pension freedom rules, and withdrawn funds from their pension pot.
As soon as funds are extracted, the MPAA rules come into effect, meaning there is a £4,000 annual cap on the amount of money that can be saved in a pension scheme, regardless of which pension savings account has been accessed.
There are fears that many over 55s will unknowingly have pension contributions limited to £4,000 because they have accessed their pension flexibly, perhaps to cope with loss of income or employment during the pandemic.
Individuals earning £30,000 per year who have accessed their pension flexibly will trigger the MPAA with pension contribution rates over 13.4%, including employer contributions. This falls to just 8% for someone earning £50,000 per year.
Once triggered, the MPAA reduces the maximum annual pension contributions in a tax year from the individual and their employer from the ‘standard’ £40,000 to just £4,000. With the disruption to employment caused by the pandemic, Aegon fears many more over 55s will have taken money from their pension to tide them over, but on regaining employment will be limited in their ability to get retirement plans back on track because of the £4,000 limit.
Individuals who break the MPAA must fill in a self-assessment tax return. Responding to Aegon’s information request, HMRC explained that it does collect data from individual tax returns on how many individuals contribute above their allowance. However, this does not distinguish between those who exceed the standard £40,000 limit, those high earners affected by the tapered annual allowance, or the likely far wider group of moderate earners who inadvertently break the £4,000 MPAA.
Steven Cameron, pensions director at Aegon said: ‘There are widespread concerns that the money purchase annual allowance of £4,000 has been set too low. It’s very concerning that HMRC isn’t collecting the detailed data to show the scale of the issue and how this is changing over time.
‘We fear the MPAA is catching an increasing number of over 55s who take some of their pension flexibly, without realising the limit this places on future pension contributions, including through auto enrolment workplace schemes. Anyone who does pay above the MPAA is subject to a tax charge.
‘The pandemic has caused major disruption to many individuals’ employment or income, and many more over 55s may have turned to taking benefits from their defined contribution pension as a temporary source of income to tide them over. Hopefully, those who want to, may regain employment and want to continue to save for a future retirement. But many, including some on moderate incomes, could find the MPAA places a limit on future contributions, denting their ability to get their retirement plans back on track.
‘It’s very concerning that HMRC isn’t collecting data on how many people are affected by this. Their data combines this group with those breaching the £40,000 standard annual allowance, or the tapered annual allowance, both of which consist of a very different population of people, mostly high earners, including those receiving a boost to their defined benefit pension because of a large salary increase.
‘We urge HMRC to update the data it collects, to reveal the number of people whose retirement plans are being damaged by such a low MPAA. In the meantime, we would encourage the government to urgently consider increasing the MPAA from £4,000 back to its original level of £10,000.’
