The government has faced further calls to increase the Money Purchase Annual Allowance (MPAA), after comments from the Treasury revealed that around 25 per cent of pension savers aged 55 and over contributed above the MPAA in 2020/21.

AJ Bell previously wrote to the Treasury warning that savers could be forced to dip into their pensions earlier than planned amid rising inflation, arguing that the MPAA is "deeply unfair" and will leave savers "hamstrung" when looking to rebuild their pension.

Responding to this letter, Economic Secretary to the Treasury, Andrew Griffith, revealed that the government estimates that around 25 per cent of occupational defined contribution (DC) pension savers aged 55 and over made annual contributions, including from employers, of more than £4,000 in 2020/21.

However, he clarified that this 25 per cent includes those who have not yet accessed their pension flexibly, arguing that the number of people affected by this change will, in practice, be "significantly less".

"Across the population of occupational pension savers more broadly, median annual DC pension contributions were around £2,000 in 2020/21," he added.

In addition to this, Griffith argued that the MPAA is a "simpler and more appropriate method than any alternative", stating: "These rules therefore minimise the extent to which there is a continuing opportunity for individuals to reduce their tax bill in a way that is not consistent with the spirit of the pensions tax system.

"The government keeps all aspects of the tax system under review through the annual Budget process.

"Other methods to control recycling, such as restricting the tax-free lump sum, were considered when the flexibility provisions were being introduced.

"However, stakeholders favoured the money purchase annual allowance and the government believes that this is a simpler and more appropriate method than any alternative."

Despite this, AJ Bell argued that the government should consider increasing the MPAA, or removing it altogether, with AJ Bell head of retirement policy, Tom Selby, highlighting the latest government data on flexible pension withdrawals as further evidence that "squeezed savers are being forced to turn to their pension pots to make ends meet".

He stated: “In the first three months of the 2022/23 tax year, for example, over half a million people withdrew £3.6bn from their retirement pots, a 23 per cent increase versus the same period in 2021/22.

“While we don’t know exactly what has driven this behaviour, the most likely culprit is spiralling inflation. With millions of families struggling to pay the bills at the moment, for many turning to their hard-earned pensions will feel like the only option.

"There will also inevitably be lots of parents or grandparents who are taking some income from their pensions to help younger generations get by.

"The MPAA permanently slashes your annual allowance from £40,000 to just £4,000, while also removing your ability to carried forward unused allowances from the three previous tax years.

“Keeping this roadblock to saving for retirement in place isn’t just bad for individuals – it runs counter to stated government policy.

"The government is desperately trying to get older people back into the workforce, yet by setting such a low MPAA it is creating a disincentive by limiting their ability to build or rebuild their pension.

“As a minimum, the Chancellor should increase the MPAA to £10,000, the level it was originally established at. However, over the medium-term the Treasury should consider whether the MPAA is necessary at all.”

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