The Money Purchase Annual Allowance (MPAA) poses hidden risk to over 55s who have accessed their pension early due to the Coronavirus pandemic, according to a new report.

Those earning £30,000 per year who have chosen to access their pension flexibly during the Coronavirus pandemic will trigger the MPAA with pension contribution rates over 13.4%, according to the new report from pension provider Aegon.

The impact is lower for higher earners with this falling to 8% for someone earning £50,000 per year.

Aegon has called for the MPAA limit to increase from £4,000 to at least £10,000 to prevent further risks to retirement plans.

According to the provider, the suitability of the MPAA has already come under pressure with changing retirement patterns, as an increasing number of people are accessing their pension flexibly to support a gradual transition to retirement.

However, Aegon says the Coronavirus pandemic has bought the £4,000 contribution limit under further scrutiny. This is because over 55s facing financial difficulty during the pandemic may have dipped into their pension for short-term financial relief but will now find themselves restricted to the MPAA limit for any future pension contributions.

Steven Cameron, pensions director at Aegon, said: “The last 18 months have seen many individuals face difficult decisions as the coronavirus has left a damaging toll on personal finances. Those over 55 who have lost their job or faced reduced wages, may have been tempted to dip into their pension to access financial support during the crisis. But the ability to access pension savings flexibly comes with a sting in the tail as it triggers the little-known money purchase annual allowance (MPAA), which limits any future pension contributions to just £4,000 per year, one tenth of the standard £40,000 limit.

“The pandemic has highlighted the need for greater flexibility and we’re calling on the Government to increase the MPAA to ensure people who have been adversely effected by the crisis are not left disadvantaged in their ability to rebuild their pension savings. Increasing the MPAA limit to at least £10,000 would go some way to help those individuals whose retirement plans have been thrown into disarray.”

The MPAA was introduced alongside Pension Freedoms to prevent people drawing money from a pension and recycling it back into a pension scheme to claim further tax relief on these contributions.

It is triggered when individuals flexibly access their defined contribution pension and limits the amount of future annual contributions to a pension from £40,000 to £4,000 if incurring a tax penalty is to be avoided.

While some schemes base contributions on total earnings, others are based on qualifying earnings between £6,240 and £50,270 (for 2021/22). For these schemes, individuals earning £30,000 per year will reach the MPAA limit with a pension contribution of 16.9%. This falls to 9.2% for someone earning £50,000 per year.