Govt urged to scrap MPAA and LISA exit penalty

The Government has been urged to scrap the money purchase annual allowance (MPAA) as part of its coronavirus response.

Investment platform, AJ Bell, suggested this would enable over-55s who access taxable income from their pension to rebuild their pension savings quickly once the crisis is over.

AJ Bell has also called for the Lifetime ISA (LISA) exit penalty to be reduced from 25% to 20%, which it believes would help younger savers.

The measures, AJ Bell indicated, would make it easier for millions of people to use their savings to “plug short-term income gaps” during the coronavirus crisis.

AJ Bell senior analyst, Tom Selby, said that it is important the savings system doesn’t “unnecessarily penalise” individuals responding to unprecedented circumstances.

“At the moment, anyone who accesses taxable income from their pension is hit with the MPAA, lowering their annual allowance from £40,000 to just £4,000,” Selby commented. “In tough times, it is likely more people will turn to their retirement pot to cover a short-term income gap, and in these circumstances it feels unfair to handicap their ability to rebuild their retirement savings once the crisis has lifted.

“There are also over 200,000 people with LISAs who would be hit with a 25% exit penalty if they accessed their fund to make ends meet. Recent stock market falls means they will already be getting back less than they put in and the exit penalty punishes them further.

“Given many LISA holders will now be facing significant employment uncertainty, we urge the Treasury to reduce this to 20%, so the charge just returns the upfront bonus plus any investment gain or loss. This means younger investors would only suffer market losses on their original investment rather than an additional penalty from the Government.”

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