There is mounting evidence that squeezed savers are being forced to turn to their pension pots to make ends meet during the cost-of-living crisis after the Government has admitted that a quarter of pension savers over 55 contributed above the money purchase annual allowance (MPAA) in 2020/21.

Online investment company AJ Bell wrote to the Treasury last year warning rising inflation risked forcing people to dip into their pensions earlier than planned, following official statistics that revealed a staggering £3.6 billion of flexible pension withdrawals were made by over 500,000 people between 1 April and 30 June 2022 – a 23% increase compared to the same period in 2021.

Those who flexibly access taxable income from their retirement pot will trigger the MPAA, reducing their annual allowance from £40,000 to just £4,000.

A J Bell is proposing that the Chancellor should increase the MPAA to £10,000 at the Budget and review whether it is necessary at all.

Tom Selby, head of retirement policy at AJ Bell, comments: “In the first three months of the 2022/23 tax year, over half a million people withdrew £3.6 billion from their retirement pots, a 23% increase versus the same period in 2021/22.

“While we don’t know exactly what has driven this behaviour, the most likely culprit is spiralling inflation. With millions of families struggling to pay the bills at the moment, for many turning to their hard-earned pensions will feel like the only option. There will also inevitably be lots of parents or grandparents who are taking some income from their pensions to help younger generations get by.

“For those who trigger the money purchase annual allowance (MPAA) by accessing taxable income flexibly from their pension for the first time, the impact on their ability to rebuild their fund will be significant. The MPAA permanently slashes your annual allowance from £40,000 to just £4,000, while also removing your ability to carried forward unused allowances from the three previous tax years.”

“The Treasury itself admits around 25% of pension savers aged 55 and over contributed above the MPAA in 2020/21. This, combined with the fact many will be forced to turn to their pension in the coming months and years to cover higher living costs, points to a real risk of mass breaches of the MPAA.

“If you exceed your annual allowance, you will be hit with an annual allowance tax charge which recoups the upfront tax relief you received. If you’re unsure about how this might impact you and want some help, you could speak to Pension Wise.

“Keeping this roadblock to saving for retirement in place isn’t just bad for individuals – it runs counter to stated Government policy. The Government is desperately trying to get older people back into the workforce, yet by setting such a low MPAA it is creating a disincentive by limiting their ability to build or rebuild their pension.

“As a minimum, the Chancellor should increase the MPAA to £10,000, the level it was originally established at. However, over the medium-term the Treasury should consider whether the MPAA is necessary at all.”

How can people access their pension without triggering the MPAA?

1. Just take your tax-free cash. While accessing taxable income flexibly from your pension will trigger the MPAA, withdrawing your tax-free cash won’t. It is possible to ‘partially crystallise’ your fund so you just take out the tax-free cash you need, with the rest left in your fund and able to grow tax-efficiently.
2. Take a small pot withdrawal. If your fund is worth £10,000 or less you can withdraw both the tax-free and taxable element flexibly without triggering the MPAA. You must extinguish the entire fund in order not to trigger the MPAA. You can take up to three small pot withdrawals worth £10,000 or less in your lifetime.
3. Capped drawdown. Capped drawdown is no longer available, but some savers who were in capped drawdown before April 2015 have remained in it. Provided any withdrawals taken via capped drawdown do not exceed the maximum income limit (150% of the GAD annuity rate), the MPAA will not be triggered.

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