Higher pension savings allowance: good news for retirees returning to work – but watch the small print
The Low Incomes Tax Reform Group (LITRG) has welcomed the announcement in today’s Budget1 that the Money Purchase Annual Allowance (MPAA) will increase from £4,000 to £10,000 a year from 6 April 2023. But LITRG is warning savers that they still need to notify their pension providers if they trigger the MPAA.
The MPAA limits the amount savers can invest into a pension scheme each year free of tax where they have already withdrawn money from their pensions under the ‘freedoms’ introduced in 2015. 2 Those who have not triggered the MPAA3 are subject to the normal – usually much higher – Annual Allowance rules for pension savings.
The increased MPAA means that savers who have taken money from their pension under the ‘freedoms’ will now be able to save more money into their pensions free of tax.
LITRG is urging these savers to notify their pension providers that they have triggered the MPAA. This is a legal requirement, but it might not be obvious, particularly if someone is auto-enrolled into an employer’s pension scheme. Failure to do so could result in HMRC issuing penalties for failure to notify, even if they do not breach the allowance.
Antonia Stokes, Technical Officer at the Low Incomes Tax Reform Group, said:
“Given the current cost of living crisis, it’s possible that some retirees may decide to return to work to supplement their pension income.4 Equally, some people may have needed to access their pension savings before taking full retirement to help meet rising living costs.
“Raising the MPAA to £10,000 should help to reduce the number of people who face tax charges because they are saving more into their pensions.5
“Such charges could be a particular risk for those who are continuing to work as employees, who are subject to the ‘auto-enrolment’ pension rules. People saving for a pension under auto-enrolment might not always be aware of the amounts being saved into a pension scheme on their behalf.6
“However, the increase does not mean that savers can relax. This is because people who flexibly access their money purchase pension savings may not be aware of the MPAA and the obligations that it brings.
“The publicity that accompanies the increase in the allowance to £10,000 therefore needs to raise awareness that anyone who flexibly accesses their pension savings must tell any other existing or new pension providers that they have triggered the MPAA.7
“This requirement applies where you continue to pay into other pensions, even if you are not at all likely to exceed the MPAA and face a tax charge. HMRC can charge penalties if the notification is not made.”
