The Chancellor is reportedly considering ways to entice older Britons who are no longer employed to return to the workplace. However, Jeremy Hunt is being warned that people in their 50s and over 60s face being “clobbered” with a tax bill which comes from a specific pension rule.
Retirees who come back to work may be unable to build back their pension pot if they have already dipped into it for their retirement.
Specifically, older Britons risk running foul of The Money Purchase Annual Allowance (MPAA).
This allowance places a restriction on people who have already accessed their pension to contributions of just £4,000 annually.
Experts are sounding the alarm that many older Britons are unaware of this pension allowance and could be “clobbered” with a tax bill as a result.
Helen Morrissey, the head of retirement analysis at Hargreaves Lansdown, emphasised the “restrictions” placed on pensioners thanks to the MPAA.
She explained: “Jeremy Hunt is urging older people who have left the workforce to return, and rising costs in retirement may mean a return to work is attractive for some.
“However, if they’ve accessed their pension, they may face restrictions on how much they can contribute to rebuild it and this needs to be looked at.
“This is way lower than the £40,000 annual allowance and if you break it, you get clobbered with a tax bill.”
The MPAA comes into effect for taxpayers once they begin to access their retirement savings for the first time.
Everyone has a yearly allowance which limits how much they can place into their pension pot with the MPAA replacing this threshold once someone starts accessing their retirement fund.
As it stands, the pension allowance is £4,000 but it was originally set at the much larger amount of £10,000.
Comparatively, the annual pension allowance is sitting at £40,000 for each taxpayer for this year.
This includes all of a taxpayer’s contributions, tax relief and employer contributions across their pension arrangements.
After someone has begun to take money from their pension pot this annual allowance is replaced by the MPAA.
Considering the Chancellor is looking to get older people back into the workforce, the pension allowance could disincentivise those who would otherwise be interested int doing so.
Hargreaves Landsown’s retirement expert is calling for the MPAA to be scrapped in Jeremy Hunt’s upcoming Budget.
Ms Morrisey added: “The MPAA needs to be removed as part of a wider review of pension tax relief.
“This means people who have taken a career break and return to work have a better chance of rebuilding their pensions.
“The MPAA was introduced to stop ‘recycling’, where people access their pension and then re-invest contributions for another round of tax relief.
“But, the same thing could be achieved with anti-recycling rules, which only kick in when someone has accessed their pension with the express intent to recycle the cash.”
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