Over 55s risk sleepwalking into Money Purchase Annual Allowance tax charge

  • Three in five over 55s with a Defined Contribution (DC) pension (62%) have never heard of the MPAA
  • Just 4% say they know exactly what it is and how it works
  • Over a quarter (27%) of over 55s with a DC pension have accessed it since 2015
  • Many have used or plan to use pension freedoms to pay off debts (15%), to cope with cost of living (14%), or spend on essentials (14%)

New research1 shows the Money Purchase Annual Allowance (MPAA) has created a pensions tax trap for millions of over 55s. Awareness of the MPAA is very low: 62% had never heard of it; only 35% were aware of it and just 4% knew exactly what it involves. Of those who were aware of the MPAA, just 11% were able to correctly identify what it is when tested.

The research also found 27% of those surveyed had accessed their DC pension since 2015. This bears out data from elsewhere (FCA and ONS) showing large numbers of over 55s have accessed their pensions, many ahead of their intended retirement date, potentially inadvertently triggering the MPAA which restricts future tax incentivised pension saving.

Complexity and the barrier to employment

When asked about pension saving rules, three quarters (74%) of  over 55s with a DC pension agreed the rules around accessing pensions are too complicated. 44% agreed the MPAA  could act as a barrier to making further pension contributions and 44% also agreed it could act as a barrier to retirees  returning to the workplace.

Canada Life has written to the Treasury, arguing for the MPAA to be put back up to its pre-2017 level of £10,000 in the upcoming Spring Budget 2023, and for the Treasury to review how it operates.

Andrew Tully, technical Director, Canada Life comments:

“There’s a clear risk here, not just to high earners, but to people on average incomes, who have needed to tap into their retirement savings over the past few years. As they resume their working lives, automatically joining a workplace pension and recommencing saving for retirement, they unwittingly face being hit with a tax charge.

“A small change to the rules could make a big difference and could even save the Treasury some money. The original impact assessment showed a net gain to the Treasury of around £75 million when they cut the allowance; but the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts.

“Our research shows a small adjustment to the rules could prevent an unfair tax charge being imposed on people it was never intended to hit in the first place.”

Changing the rules

The MPAA was introduced in 2015 as part of the pension freedom changes; it is necessary to stop over 55s getting their salary paid directly into their pension, drawing the money out using the freedoms (with 25% taken tax free) and endlessly repeating the process. So once someone has used the pension freedoms to flexibly access their pension, their allowance for future contributions is cut from the usual £40,000; initially the MPAA was set at £10,000.

However, in 2017, the Treasury reduced the MPAA from £10,000 to £4,000. Canada Life is campaigning for the Treasury to reverse this cut in the allowance, as well as looking at possible changes to the rule to make it more light touch.

Budget submission

If you’d like a copy of Canada Life’s detailed Budget submission setting out the arguments in more detail, you can access a copy here




Press enquiries should be directed to:

Elle McAtamney at Canada Life, elle.mcatamney@canadalife.co.uk

Notes to editors:

  1. Source: Canada Life research among 1500 UK adults aged 55+ with a DC pension, with fieldwork conducted by Opinium between 30th January and 6th February 2023.

About Canada Life:

Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiary companies, Lifeco has operations in Canada, the United States, and Europe. Great-West Lifeco and its insurance subsidiaries have received strong ratings from major rating agencies.  Great-West Lifeco has over 30 million customers worldwide and £1.341 trillion assets under administration (as at 31 December 2021).

Canada Life Limited began operations in the United Kingdom in 1903 and looks after the retirement, investment and protection needs of individuals and companies alike. As well as providing stability and security through its individual contracts, Canada Life Limited has grown to become the leading provider of competitively priced group insurance solutions. Canada Life acquired Retirement Advantage on 3rd January 2018 for an undisclosed sum. The acquisition added over 30,000 retirement income and equity release customers and more than £2 billion of assets under management including a £1.5 billion block of in-force annuities to Canada Life.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (U.K.) Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 05487702. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.