Creating incentives to ‘unretire’? Reform of the Money Purchase Annual Allowance (MPAA)
“Worker shortages have led to much discussion among policymakers as to how you encourage older people back to work. One solution being put forward is reform of the Money Purchase Annual Allowance, a relatively unknown pension rule that limits the amount savers can add to their pension once they have begun taking an income.
“There are good reasons to look again at the rule which reduces people’s annual saving allowance from £40,000 to £4,000. A combination of the pandemic followed by cost of living crisis means many people will have dipped into their pensions for short-term purposes.
“We believe an increase in the limit may help but its benefit will be limited to those on relatively large incomes and bigger questions have been raised as to whether it’s really health issues, or some people’s relatively good financial position that are keeping older people out of the workforce.
Challenging environment in which to review the pensions lifetime allowance (LTA)
“The LTA is another factor referenced as discouraging some older people from continuing to work and is regularly cited as an issue among NHS doctors in particular. While a savings allowance of just over £1m sounds like a huge sum, many middle earners who consistently save over a lifetime could be caught out and eventually hit the limit incurring significant tax bills. Reaching the Lifetime Allowance doesn’t necessarily lead to wealth - according to MoneyHelper's annuity comparison tool, if someone bought an inflation-linked annuity at current rates with a pot the size of the current Lifetime Allowance, £1,073,100, they would secure an income of £3,727 a month or £44,724 a year[1]. This is just above the Pensions and Lifetime Savings Association's estimate for a ‘comfortable’ standard of living for a single person, and below the estimate for a couple.
“Realistically we’d be surprised if we saw any movement on the allowance at next week’s Budget. It was just twelve months ago that the Lifetime Allowance frozen until 2026 and while it looks like the Chancellor may have some headroom in the public finances, we’re not expecting a give away to better off pensioners.
“In the long-run however, this is an allowance that really isn’t fit for purpose as an increasing number of people will reach the limit and change is needed to ensure that those who do the right thing and save for their retirement aren’t unduly penalised.”
Should those in their mid-50s be expecting a later state pension age?
“There were reports earlier this year that increases to state pension age might be brought forward as part of a government review due in the coming months. Those in their mid-50s will be watching this particularly closely as the first group who might potentially be affected by any change.
“At present state pension age is 66 and on current plans is set to rise to 67 by 2028 and to 68 between 2044 and 2046. The speculation was that the move to 68 could be brought forward to as early as 2035 meaning people in their mid-50s might face a longer wait.
“Any change could create retirement planning challenges for those looking to retire ahead of state pension age, as the number of years they will need to fund themselves increases making it particularly important that changes are widely communicated.
Triple Lock
“We’d expect the Chancellor to make a point of referencing last year’s decision to maintain the triple lock. Increasing the payment in line with inflation from April this year will be costly but will take the value of the new single tier state pension above £10,000 per year for the first time. This will be welcome news for pensioners but it does move the value of the payment much closer to the tax free personal allowance of £12,570 meaning increasing numbers of pensioners are likely to pay tax.
Barrage of suggestions on pension tax including proposals on tax free cash
“It wouldn’t be a Budget if there weren’t some speculation around the future of the pension tax system. In recent months we’ve seen the publication of a number of reports from think tanks calling for an overhaul of the current rules. The suggestions have ranged from limiting the value tax free cash that can be taken to including pensions within people’s estates for inheritance tax.
“We’d be surprised if the government deemed reform a priority at the moment given the complexities involved in making changes. There’s also the risk that any change is viewed as further tinkering in a system where people want certainty around the rules and the outcomes they can expect at retirement.
Auto-enrolment reform is on the agenda – but does it go far enough?
“October 2022 marked ten years of auto-enrolment, which has been a huge success, revolutionising pension saving for millions of people and embedding a long-term savings culture into the workforce. However, as we move into auto-enrolment’s second decade, it’s clear that more needs to done to maintain this trajectory and ensure UK workers are on course for a comfortable retirement.
“The new pension minister Laura Trott has said she is supportive of implementing the recommendations of the 2017 auto-enrolment review but work needs to be done around agreeing a full timeline. It’s a positive sign that the Government is supporting the recent Private Member’s Bill which will allow the qualifying age for automatic-enrolment to come down from 22 to 18 as well as removing the lower earnings threshold which will mean people will be able to start contributions from the first pound of earnings. This Bill represents a first step towards a significant change in the auto-enrolment system but further legislation will be required to bring it into effect.
“However, it seems any change to the percentage of salary contributed by employee and employers is off the table while inflation stays high. Further down the line we’d like to see minimum contributions increase to 12% as contribution levels are the single biggest lever we can pull to reduce under-saving and improve retirement outcomes. The economic forecasts set out by the Chancellor this Spring Budget may help inform the debate about when and how quickly contributions should be increased and everyone will be hoping that predictions of falling inflation this year do come to pass.”
Simplicity key to pension engagement
“All these issues highlight the complexity of the pensions system. Recent Standard Life research found that half (50%) of UK consumers already think information around pensions and retirement is overwhelming, and more than two in five (41%) admit they have no idea what to do next after receiving it*. More than anything, we’d like to see any reform reflect the need to simplify rather than complicate pensions, as this is key to enabling greater engagement with retirement savings, and, by extension, improving retirement outcomes.”
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