Pension and investment companies representing millions of British retirement savers have called on the government to review a tax rule which they say is penalising over-55s returning to work.
In a letter to the Treasury ahead of this month’s Budget, more than a dozen companies, including leading pension groups and trade associations, have urged ministers to change the rule that governs how much can be saved into a pension before tax charges apply.
The intervention comes as Mel Stride, the work and pensions secretary, is looking at ways to combat a rise in economic inactivity during the pandemic that is clouding the UK’s long-term growth prospects. One of the main drivers is older workers in relatively well-paid jobs taking early retirement.
Most people can contribute up to £40,000 into their pensions each year before tax penalties kick in. However, this standard allowance can be slashed to £4,000 for some over-55s who have dipped into their pensions.
The letter, signed by companies including Aegon, Canada Life and Fidelity, said the £4,000 threshold, known as the money purchase annual allowance (MPAA) is a “possible issue” for hundreds of thousands of over-55s looking to return to work.
“Anyone who has accessed their pension flexibly and who now wants to return to work and build up further retirement savings, is capped at contributing no more than £4,000 a year or will face a tax charge,” said the letter.
“This means a median earner in their 50s would be caught if they paid 12 per cent of salary into their pension. They face an older worker penalty that prevents them from saving for retirement and may discourage them from seeking out employment.”
Last month, the Resolution Foundation think-tank suggested the government should crack down on pension freedoms and tax breaks that encourage wealthy people to retire early.
Political pressure for pension reform is also increasing. Jonathan Ashworth, the shadow work and pensions secretary, this week pointed to a 50 per cent increase over the past two years in the number of over-55s cashing in their pensions early, adding that some people were doing this “simply to help make ends meet as the cost of living climbs”.
Official data also points to a recent rise in the number of older people returning to the workforce, which Xiaowei Xu, at the Institute for Fiscal Studies, described as a likely “response to people becoming poorer”.
The letter urges the Treasury to restore the MPAA to £10,000, the original level it was set at when the allowance was introduced in 2017. It was designed to prevent people recycling pension cash they had taken into their existing pension for tax relief.
Canada Life, one of the signatories to the letter, estimates between 500,000 and 1mn people in the UK of working age are now restricted by the MPAA. This is based on the numbers who have used the pension freedoms and the fluctuations in employment patterns over the course of the pandemic.
“Increasing the MPAA back to £10,000 would help strengthen the UK economy and boost the retirement provision of the hundreds of thousands of workers who left employment during the pandemic,” said Lindsey Rix, Canada Life’s UK chief executive.
A Treasury spokesperson said: “The money purchase allowance affects around 25 per cent 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.”