Retirement specialist Just Group called for stronger support for pension savers who are thinking of taking taxable cash from a pension while still continuing to work and save into an employer’s pension scheme.
“Nearly nine in 10 (88%) eligible employees aged between 50 and State Pension age are automatically enrolled into workplace pensions, a number that rose by 26 percentage points between 2012 and 2019,” said Stephen Lowe, group communications director at Just Group.
“The Financial Conduct Authority has described taking pension cash early as ‘the new norm’ but taking taxable payments while still working can make pension saving much less attractive, impacting not just the highly paid but those on more modest salaries still trying to build their retirement funds.”
“It is not reasonable for policymakers to expect most people to be aware of and understand the complexities and consequences of the rules which impact their ability to keep saving into a pension. Nearly four in five pensions accessed by those aged 55+ each year without advice are missing out on the free, independent and impartial guidance they are entitled to from Pension Wise that could help them navigate these complex rules.
“The need to increase guidance usage is acknowledged by the government and the Financial Conduct Authority but solutions presented so far have been too tame to make the transformation in numbers required. A more effective answer would be to automatically enrol people into guidance from age 50, bringing the same kind of support provided to pension savers to those starting to draw out their cash.”
He said the freeze in the MPAA at £4,000 combined with new tax thresholds for 2020-21 shows how more employees, even those contributing the minimum 8% of salary to a workplace pension, could start to feel the squeeze due to pension contributions that exceed the allowance.
In 2020-21 the marginal rate of income tax was 20% on earnings up to £50,000 and someone earning that amount making an 8% pension input would be within the £4,000 MPAA limit.
For 2021-22 the 20% tax threshold is £50,270 and someone earning that amount making the 8% contribution would have an input of £4,021, just above the £4,000 limit. The scheme member would face an annual allowance charge on the £21 excess, in effect clawing back tax relief and reducing the tax efficiency of saving into the pension.
“The 8% figure is relevant because it reflects the current minimum contribution that must be made to workplace pensions under the automatic enrolment rules,” he said. “Technically the 8% is based on a ‘qualifying earnings’ band that starts at £6,240 but employers are often more generous and pay it on the whole salary or will contribute at a higher rate than the minimum.”
“People currently contributing under the £4,000 limit could easily be caught in the future as they receive pay rises, job promotions or bonuses, or where they or their employer increase the amount being contributed to the pension, perhaps trying to maximise their funds in the run-up to retirement.
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