The latest figures suggest that thousands of retired people are returning to work. If you’re thinking about doing the same, you need to be aware of the Money Purchase Annual Allowance (MPAA).
Figures from Royal London suggest that some people that retired during the pandemic have returned to work in some way. The number of people aged between 50 and 64 that are “economically inactive” fell by 84,000 in the three months to October 2022.
There are many reasons why someone may choose to return to work. It may have been part of their plan after taking an initial break, or some may find they missed the structure that work provides. High inflation over the last year is likely to have played a role in the decision for many too, as the cost of living has significantly increased.
There are different ways to return to work as well. While some may have returned to a similar full-time position they held before, others may be working part-time, be self-employed, or even running their own business.
One of the potential long-term benefits of returning to work is that it could provide an opportunity to boost your pension savings and the income you receive when you retire. However, the MPAA could limit how much you’re able to tax-efficiently save through a pension.
The amount you could tax-efficiently save into your pension could fall to just £10,000
When you save into a pension, the government provides tax relief, which boosts your savings. This makes pensions a tax-efficient way to save for retirement.
There is a limit on how much you can save without suffering a tax charge. For many people, the Annual Allowance is up to £40,000 each tax year, up to 100% of their annual earnings. However, if you have already taken a flexible income from your pension, this falls significantly to just £10,000 under the MPAA (as of the 2023/24 tax year).
It could mean you can’t tax-efficiently contribute as much to your pension as you first believe. If you’ve returned to work to increase your financial security or income later in life, the MPAA could harm your long-term plans.
As pension contributions are typically invested to deliver returns over the long term, the impact of a lower Annual Allowance for your projected retirement income could also be more than you think.
If you’re affected by the MPAA it’s important to understand how your contributions will add up and what it means for your financial future.
While you can usually carry forward any unused Annual Allowance for up to three years, this isn’t normally the case if you’re subject to the MPAA. So, if you want to save as much as possible through your pension after returning to work, making regular contributions and using the full MPAA each year could make sense.
You may be able to withdraw some money from your pension without triggering the MPAA. This includes taking small pension pots, usually defined as less than £10,000, and taking up to 25% of your pension as a tax-free lump sum.
So, if you want to take some time away from work but intend to return, considering these options could mean you can still benefit from a higher Annual Allowance in the future.
If you will be taking lump sums from your pension, remember to consider the long-term effects. Taking part of your savings now could mean you have less when you retire and are at risk of running out of money during your lifetime. We can work with you to understand how taking a lump sum from your pension now could affect your long-term finances.
Exceeding the Money Purchase Annual Allowance could result in an unexpected tax bill
If you exceed the MPAA, you will get a tax charge on any pension contributions that exceed it, this includes contributions you make and those made on your behalf, such as those made by your employer.
Understanding how much you could be charged can be complex and will depend on when you first accessed your pension. However, it could reduce how much you have for retirement and may affect whether saving into a pension is the right decision for you.
We can help you calculate a potential tax charge and review your alternative options to get the most out of your money if the MPAA could affect you.
Update your financial plan if you’re returning to work
If you’re returning to work after taking time off, updating your financial plan could help keep you on track and make the most out of your money.
A tailored financial plan can identify potential opportunities, help you understand your tax liability, and set out the steps you need to take to reach your goals. Please contact us to talk about your plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning.
