Pension companies are calling for an urgent overhaul of tax rules

Britain’s biggest pension and investment firms have called on Jeremy Hunt to use the upcoming Budget to reform tax rules they say penalize over-50s returning to work.

An unprecedented coalition of financial giants, including stockbroker Hargreaves Lansdown and the Association of British Insurers, a powerful City lobby, urged the chancellor to raise the “annual money purchase allowance” cap.

The MPAA limits tax-free retirement savings when a person has already started drawing income from it. Workers can normally save up to £40,000 in their pension tax-free, but when the MPAA is activated this drops to £4,000.

A letter to Guy Opperman, Minister of State for Employment, and senior finance ministers Andrew Griffiths and Victoria Atkins called on the government to review the rule in the Budget on March 15.

The letter said: “It is clear that the MPAA is already a potential issue for hundreds of thousands of workers over the age of 55. They face an older age penalty that prevents them from saving for retirement and can discourage them from looking for work.

“This is not good for them, not good for the economy, not good for the State, who are potentially losing millions of pounds in income tax and National Insurance revenue from their work.”

The MPAA limit limits up to one million working-age people, according to estimates from pension provider Canada Life.

Robert Yuille, of the ABI, said: “This rule penalizes people who want to get back into work and rebuild their savings. It was never designed for that purpose – it was intended to prevent people from recycling their retirement savings. This happens when people withdraw money from their pensions, then put the cash back in and get tax relief back.

“When the MPAA limit of £10,000 was first introduced, it affected a small number of people. But reducing it to £4,000 in 2017, and not changing it since, means more people are affected than predicted.’

Pensioners have called on the government to restore the MPAA to £10,000, the original level at which it was introduced in 2012.

Lindsey Rix, head of pension provider Canada Life UK, said: “Any modest cost to the Government from the higher benefit could be more than offset by increased tax revenue. Even a modest boost to employment would result in higher income tax revenue, as well as tax revenue such as higher VAT from increased spending.”

A worker in his 50s in a high-quality “defined contribution” pension scheme would only need to earn more than £26,667 to fall under the MPAA, Canada Life estimates.