AJ Bell press comment – 17 January 2023
- Employment levels among over 50s have surged by over 200,000 since the start of 2021, AJ Bell analysis of official data reveals (A01: Summary of labour market statistics - Office for National Statistics (ons.gov.uk))
- Trend is being driven by rising employment levels among those aged 50-64, with many of these people likely ‘unretiring’ due to the cost-of-living crisis
- A Government review is looking at ways to further boost employment levels among older people, with ideas reportedly ranging from preferential tax rates to a ‘mid-life MOT’
- The pension tax system acts directly counter to this aim by restricting retirement saving incentives for those who have accessed their pension flexibly
- Treasury urged to increase money purchase annual allowance (MPAA) to £10,000 at the Budget
Tom Selby, head of retirement policy at AJ Bell, comments:
“The Government is desperate to boost employment levels among older people as it battles to fill holes in the labour market and prevent the UK economy falling into recession.
“Ministers are reportedly considering a range of interventions, from introducing so-called ‘mid-life MOTs’, designed to help people assess their finances, to more radical proposals that could provide favourable tax treatment to over 50s who return to the workforce.
“During the pandemic employment levels among over 50s plummeted, with around 200,000 people in this age bracket exiting the workforce. Many will have done so in order to take early retirement.
“As living costs have surged, over 50s have returned to the labour market in their droves. For those with defined contribution (DC) pensions, ‘unretirement’ will likely have been a necessary decision to supplement their retirement income – at least until they become entitled to the state pension.”
The problem with the money purchase annual allowance (MPAA)
“There is no guarantee a mid-life MOT will significantly move the labour market dial among over 50s, while favouring certain age groups through the income tax system would be riddled with challenges and inevitably lead to accusations of unfairness.
“However, dealing with the cliff edge that exists when savers access taxable income flexibly from their retirement pot would be a simple, relatively low-cost way for the Treasury to show it is on the side of older workers.
“As things stand, anyone who takes even £1 of taxable income from their DC pension triggers the ‘money purchase annual allowance’ (MPAA), reducing their pensions annual allowance from £40,000 to just £4,000. Those who trigger the MPAA are also prevented from ‘carrying forward’ unused annual allowances from the three previous tax years in the current tax year.
“This means that, taken to its extreme, the MPAA could reduce someone’s available annual allowance in 2022/23 from £160,000 to just £4,000*.
“Imposing the MPAA at such a low level acts as a direct disincentive to return to work for those who have accessed their pension flexibly and plan to continue saving for retirement. It also risks leaving those who have been forced to access their pension during a period of severe financial strain hamstrung as they attempt to rebuild their fund.
“Increasing the MPAA to £10,000, the same level at which it was originally introduced, would at least give older workers a bit more freedom to save for retirement. Over the medium-term, there is a strong case for the Government to explore ditching the MPAA altogether.”
Source: AJ Bell analysis of ONS data
*Assumes person has earnings of £160,000 or more, is able to carry forward £40,000 of annual allowance from the three previous tax years, and uses their full £40,000 annual allowance in the current tax year.
