Pension savers should not be penalised for accessing pots

The ABI wants the money purchase annual allowance to be scrapped or increased, so that savers do not miss out on tax relief

Pension savers who have had to access their savings during the pandemic should not be penalised for trying to put money back in when they can, insurers have said.

The Association of British Insurers (ABI) wants the money purchase annual allowance (MPAA) to be scrapped or increased in the Budget on March 3, so that savers do not miss out on tax relief.

The pension freedoms introduced in 2015 allow over-55s to access their retirement savings flexibly.

But they risk missing out on pensions tax relief if they want to pay back the money they have withdrawn.

This is because once pension savings have been accessed, the amount eligible for pensions tax relief comes down from a maximum of £40,000 to £4,000, known as the MPAA.

The change in pensions tax relief is permanent, which means older workers who withdraw from their pension will never get a maximum of £40,000 in pensions tax relief again.

The MPAA applies if you start to take money flexibly from a defined contribution (DC) scheme. It does not apply if you take a tax-free lump sum or if you buy an annuity.

The ABI said it does not take much to exceed the MPAA.

Someone on the average salary for a 50 to 59-year-old paying minimum pension contributions would only have to pay an extra £151 a month to exceed the MPAA and miss out on pensions tax relief for contributions above that amount, the ABI said.

Someone earning the average salary for over-60s would have to pay an extra £183.

The ABI said figures show the number of pension pots accessed as a flexible income rose by 3% from 7,737 in December 2019 to 7,936 in December 2020.

Yvonne Braun, director of policy for long-term savings and protection at the ABI, said: Covid-19 has shown that households’ financial resilience can be fragile and addressing that should be a central part of the nation’s Covid-19 recovery.

Our data suggests that pension withdrawals have not yet substantially increased but the continued uncertainty and insecure job market could mean more people dipping into their retirement savings to get by, Braun said.

Braun said, removing or increasing the money purchase annual allowance will help incentivise older workers to save. This will improve their financial resilience and also make sure people are not penalised for doing the right thing by paying money back into their pension when they can afford to.