Call to relax pension rules to attract older workers

Leading financial companies and trade associations are urging the Government to relax pension rules in order to encourage more people in their late-50s and early-60s back into the workforce – and help stimulate the economy.

The group believes that current restrictions to the amount people can contribute to a pension if they have previously accessed it for cash are deterring many from returning to work.

In a joint letter to the Treasury, the group – comprising the likes of The Association of British Insurers, asset manager Fidelity and fund platform Interactive Investor – says the rules present ‘a barrier to retirement saving’.

The bugbear is the money purchase annual allowance (MPAA). This defines the maximum pension contributions a person (and their employer) can make if they have already dipped into their pension for cash – without compromising their right to tax relief on the payments made. In 2017, it was cut from £10,000 to £4,000. 

This reduction has caught out many people. During the pandemic, some people accessed their pensions to support their household finances – not knowing they were impacting their ability to save into their pension.

Canada Life says the allowance is now an issue for anyone earning £33,334 where pension contributions (from a mix of employer, tax relief and employee) are 12 per cent. Up to one million people are hit by the allowance. 

The insurer says that if the allowance was pushed back up to £10,000, the annual cost to the Treasury would be £75 million, but this would be offset by resulting tax revenues of £400 million.

In the letter to the Treasury, Tom McPhail, director of public affairs at financial consultant The Lang Cat, says the MPAA acts as an ‘older worker penalty’. 

The allowance does not apply to defined benefit pensions, just money purchase schemes which most people now contribute to. Certain pension withdrawals – such as accessing tax-free cash – do not count towards the MPAA.

The Government has embarked on a campaign to get older people back into work – and will form a key component of the Budget a week on Wednesday. 

On Friday, the Treasury said: ‘We are committed to supporting savers and have a range of incentives in place to encourage people to invest for their retirement.’