The Treasury has been urged to increase the money purchase annual allowance (MPAA) to its original £10,000 level in the forthcoming spring Budget.

The call has come from Canada Life, which has submitted a paper to the Treasury.

It argues that the current low limit of £4,000 penalises and discourages older workers who have taken time out from employment, drawn on their pensions and wish to resume saving for retirement.

The company said restoring the allowance to £10,000, its original level in 2015 before it was cut in 2017, would also help those who have accessed their pension pot at relatively young ages, for example 55 to 60.

It could allow them to pay off expensive debt, cope with the current cost-of-living crisis, or to tide people over who have been made redundant.

The MPAA effectively restricts future pension savings where someone has flexibly accessed their pension, removing the benefit of tax relief on annual contributions of more than £4,000.

Lindsey Rix, Canada Life’s UK chief executive said: “Increasing the MPAA back to £10,000 would help strengthen the UK economy and boost the retirement provision of the hundreds of thousands of workers who left employment during the pandemic.

“We believe this is a measure which would positively impact people of all social and economic backgrounds. It would help encourage a return of older experienced staff for many businesses, large or small, and whichever sector they operate in.

“And it will align well with other Government policy initiatives, such as the mid-life MOT and auto enrolment.”

She said the modest cost to the Exchequer from the higher allowance could be more than offset through increased tax revenues.

“Even a modest boost to employment would result in higher income tax revenues, as well as downstream tax revenues such as higher VAT from increased spending.”

Canada Life reckons between 500,000 and one million people in the UK of working age are now restricted by the MPAA.

This is based on the numbers who have used the pension freedoms and the fluctuations in employment patterns over the course of the pandemic.

The cost to the Treasury of changing the MPAA back to £10,000 is very modest relative to the potential benefits, it said.

Clearing this obstacle to employment for hundreds of thousands of older workers would cost around £75m a year, according to the original Treasury impact assessment.

By comparison, getting an extra 100,000 people back into employment on an average wage of £30,000 a year, would generate income tax revenues alone of £400m.