Why special pleading on the MPAA brings “pensions” into disrepute

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 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.

What evidence of anyone over 55 finding they are losing tax-relief on contributions to pensions over £4,000 pa – an issue for returning to work.

  • A recent report by LCP – using ONS data – found that most of those out of work and over 55 weren’t working for health reasons – the MPAA is not their issue.
  • The auto-enrolment contribution formula makes it impossible for anyone on standard contributions to contribute more than £4,000. The MPAA is an issue for those with highly paid , well pensioned jobs and then only a marginal one.
  • Many sophisticated employers , contracting with highly paid employments have work rounds for the annual and money purchase allowance involving extra pay in lieu.

The wider issue is that many people are unnecessarily cracking into their pension pots and drawing out more than their 25% tax -free lump sum to meet immediate needs. This is allowed under the pension freedoms but it has tax consequences, immediate emergency taxation on the taxable portion of the withdrawal and the strictures of the MPAA going forward.

People who are raiding their pot are generally doing so for one of two reasons; either they are needy and have urgent need of relief on debt or they are greedy and want an extravagant Lamborghini lifestyle.

The needy are unlikely to be in a position to save £4,000+pa in future while the greedy are precisely those who the Treasury worry about getting double tax relief, through recycling contributions for personal fiscal gain. This recycling is not victimless, it comes at the expense to the Treasury and ultimately is paid for by people who aren’t gaming the system.

Those signing this letter have yet to make a clear case for providing tax relief for those who have already overdrawn on their pot with full tax incentives.

The first thing Government will ask is whether this request is meretricious and self-serving. If it concludes that this is another attempt at special-pleading it will harden the hearts of civil servants and politicians and prove counter-productive.

There are so many injustices created in the pension systems; most of them fall upon those who are poorest  – the net pay scandal, take up of Pension Credit, inheritability of the new state pension to name but three.

By comparison, the MPAA – a tax on privilege, is an incentive for the well-off to pay attention to the tax-rules rather than be a pension Muppet.

If I was reading the letter as a Treasury official, I would treat it with contempt. This plea to raise the MPAA will be seen as opportunism, an attempt to make money out of the 700,000 elderly out-of-workers , most of whom are too sick to do productive employment.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Why special pleading on the MPAA brings “pensions” into disrepute

  1. Richard Chilton says:

    The MPAA is a wider problem than this. The trouble is, hardly anybody outside the pensions industry seems to know about it. The few people who it adversely affects only find out about it too late, if at all.

    The issue that affects many more people is the notification requirement to any other DC pension to which contributions are made. There can be penalties on those who don’t make such notifications. Once notified, that pension provider then has to make annual returns to HMRC. HMRC presumably then considers such returns and effectively throws away the vast bulk of them, as the contributions will be under the £4K limit.

    The main recycling issue, of a PCLS, is covered by other rules. The MPAA looks a bit like a sledgehammer to crack a nut.

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