Hunt pushes over-55s back to work. Then HMRC applies ‘hidden penalty’

Financial experts are warning that Hunt is working at cross purposes, and risks luring millions into a hidden pensions trap.

Many over-55s who took early retirement after the pandemic need to get back to work and earn some money as the cost-of-living crisis bites. Almost 50,000 have returned in the past three months.

Hunt is keen to encourage the “great unretirement”, as this has been dubbed, but he needs to go further.

Older workers are urgently needed to ease chronic labour shortages but they face plenty of challenges, such as ageism in the workplace, rusty skills or lack of confidence.

Now experts have highlighted a pensions threat, too.

When the over-55s return to work they face a “hidden penalty” for doing so, in the shape of something called the money purchase annual allowance (MPAA), says Tom Selby, head of retirement policy at AJ Bell.

This affects people who have taken made withdrawals from their pension fund from age 55.

Many who took early retirement will have done this to boost their income. Many will never even heard of the MPAA, or understood how it works.

Once someone makes a pension withdrawal, the MPAA slashes the amount they can invest back into a pension in future from £40,000 to just £4,000 a year.

Savers also lose the ability to carry forward unused annual allowances from the three previous tax years.

HM Treasury does this to stop people from constantly recycling their pension by taking money out and paying it back in again to claim tax relief, Selby says.

However, Selby and other pension experts now fear the MPAA is creating a major disincentive for the over-55s to return to work, by limiting their ability to build up more pension from their earnings.

One in four pension savers over 55 are already breaching the MPAA, risking penalties, and their numbers will grow unless the Treasury acts.

A string of pension companies have been calling on HM Treasury to restore the MPAA to its original level of £10,000, originally set in 2015 then cut two years later.

Ideally, they’d like to see it axed altogether.

While £4,000 a year may seem a lot to pay into a pension, figures from Canada life show that someone in their 50s joining a good defined contribution workplace pension only needs to be earning more than £26,667 a year to exceed the MPAA.

The MPAA applies to employee contributions, employer contributions and tax relief.

Canada Life chief executive Lindsey Rix said restoring the MPAA to £10,000 would boost retirement savings for hundreds of thousands of workers who left employment during the pandemic. “It would also encourage a much-needed return of older experienced staff.”

Rix said it would also align well with Hunt’s other initiatives, such as the mid-life MOT and auto-enrolment workplace pension savings scheme.

Instead of increasing the MPAA, Hunt could waive the tax charge altogether if an employee joined a workplace pension on the standard contribution rates available to all employees, Rix suggested

This would save more money than it costs. “Even a modest boost to employment would result in higher income tax revenues, as well as downstream tax revenues such as higher VAT from increased spending,” she added.

READ MORE: Early pension withdrawals could destroy your retirement – new warning

Stephen Lowe, group communications director at Just Group, said thousands of over-55s who have taken a flexible pension payments are hamstrung from saving for retirement and risk unexpected tax bills as a result.

If the original £10,000 MPAA have been increased with inflation it would be worth £12,480 today, instead of £4,000.

Since 2014, more than two million people have already taken flexible payments worth £60billion from pensions, HMRC figures show.

Another 250,000 will do so each year, becoming subject to the MPAA rules even while they work and contribute to pensions.

Lowe joined the chorus of calls for Hunt to increase the MPAA in next week’s Spring Budget.

The MPAA does not apply where the over-55s only withdraw their 25 percent tax-free cash, or cash in smaller pension pots worth £10,000 or less.

If Hunt is serious about getting older workers back to work, he needs to make sure they can generate extra pension as well as income.