The Money Purchase Annual Allowance (MPAA) has created a pensions tax trap for millions of people aged over 55, according to new research.

That’s because awareness of the MPAA is very low, said Canada Life.

Almost two-thirds – 62% - had never heard of it, according to the company’s study, while only 35% were aware of it and just 4% knew exactly what it involves.

Of those who were aware of the MPAA, just 11% were able to correctly identify what it is, when tested.

The research also found 27% of those surveyed had accessed their DC pension since 2015.

Canada Life said that bears out data from elsewhere (published by the FCA and ONS) that showed large numbers of over 55s have accessed their pensions, many ahead of their intended retirement date.

That means they have potentially inadvertently triggered the MPAA, which restricts future tax incentivised pension saving.

Andrew Tully, technical director at Canada Life, said: “There’s a clear risk here, not just to high earners, but to people on average incomes, who have needed to tap into their retirement savings over the past few years.

“As they resume their working lives, automatically joining a workplace pension and recommencing saving for retirement, they unwittingly face being hit with a tax charge.”

He said a small change to the rules – returning the MPAA to its pre-2017 level of £10,000 - could make a big difference and could even save the Treasury some money.

The original impact assessment showed a net gain to the Treasury of around £75m when they cut the allowance; but he said the cost of increasing it back again could be offset through increased employment, economic productivity and tax receipts.

Mr Tully said: “Our research shows a small adjustment to the rules could prevent an unfair tax charge being imposed on people it was never intended to hit in the first place.”

Canada Life has written to the Treasury, arguing for the MPAA to be put back up to its pre-2017 level of £10,000 in the upcoming Spring Budget 2023, and for the Treasury to review how it operates.

The MPAA was introduced in 2015 as part of the pension freedom changes.

Initially the MPAA was set at £10,000, however in 2017 the Treasury reduced the MPAA to £4,000.

Canada Life is campaigning for the Treasury to reverse the cut in the allowance, as well as looking at possible changes to the rule to make it more light touch.