We have already seen the government take a pragmatic and sensible decision to help younger investors.
Earlier this month, the Treasury confirmed it would temporarily reduce the Lifetime ISA (LISA) exit penalty from 25% to 20% as part of its response to the Covid-19 pandemic.
The announcement will affect withdrawals made between 6 March 2020 and 5 April 2021 and means the charge is designed just to return the upfront bonus for this period of time. The move makes the product simpler for people to understand, and I hope when this is all over the reduced penalty is left in place.
It is, of course, not just younger people who are likely to suffer financial distress in the coming months – many over 55s will also be forced to reassess their financial situation in light of Covid-19.
An independent survey commissioned by AJ Bell at the end of April revealed one in 10 over 55s with a pension had either already accessed or accelerated plans to access their retirement pot as a result of the pandemic. Given this was carried out about seven weeks into lockdown, it seems inevitable more will be forced down this route.
At the moment, anyone over 55 who accesses taxable income from their pension sees their annual allowance lowered from £40,000 to just £4,000 as a result of the money purchase annual allowance (MPAA).
This 90% annual allowance cut felt unfair during normal times, but during a period when many savers and their families are facing extreme financial hardship, it seems particularly cruel.
And don’t forget that triggering the MPAA also means you lose the ability to carry forward any unused allowances from the three previous tax years in the current tax year. So someone making a one-off decision to access taxable income from your pension during the current crisis could, in fact, reduce the amount they can save in a pension in the current tax year from £160,000 to £4,000 – a 97.5% annual allowance cut.
The reasons for accessing taxable income from your pension could vary from replacing lost income from employment to helping a younger relative pay their bills or older relative cover care costs. But regardless of the circumstances, the MPAA is applied indiscriminately and permanently.
Given the impact Covid-19 is having on people’s incomes, there is clearly a strong case for halting the application of the MPAA – perhaps on a temporary basis initially – so those who access taxable income from their pension during this period are not hampered in their ability to rebuild their retirement pot once this crisis is over.
At the very least, the Treasury should consider raising the MPAA back to £10,000 (the level it was set at when first introduced in April 2015).
Tom Selby is a senior analyst at AJ Bell