MPAA: what are the proposed changes?
For adviser use only
HM Treasury has proposed changes to a pension saving allowance that could endanger the future saving of thousands of investors.
When someone takes retirement income under the pension freedoms they become subject to the money purchase annual allowance (MPAA). The MPAA restricts the amount of pension contributions (individual and employer combined) that can be made to defined contribution schemes and the allowance is currently £10,000 per tax year but this figure could be reduced by 60% under the Treasury’s proposals. For most people, (the exception being very high earners) who haven’t taken retirement income using the pension freedoms, the standard annual allowance is £40,000 per tax year.
Don’t undermine pension saving
Those over 55 years of age will access their pension savings for all sorts of different reasons, and there’s little evidence of what the ‘new norm’ looks like, or even if there will be one. It is therefore particularly disappointing that the Treasury should seek to change the rules only two years after the introduction of pension freedoms.
Due to auto-enrolment, it will become increasingly common for people to continue to make pension contributions while they access their pension savings to maintain their incomes as they try to bridge the gap between stopping work completely and the higher state pension age.
The drastic reduction in the MPAA could prevent more people from rebuilding their pension in later life, harming their savings potential.
HM Treasury has long held concerns about the potential for ‘tax-free lump sum recycling’, whereby a tax-free lump sum is withdrawn from a pension fund and immediately invested back into a pension as further contributions.
The Treasury considers this to be a misuse of the system, as individuals effectively get a double dose of tax relief by paying what can be the same money into pensions twice. Limiting recycling was the main reason that the MPAA was introduced.
The Treasury’s consultation showed that fewer than 3% over the age of 55 make contributions of more than £4,000 a year into defined contribution (DC) pensions. We believe very few individuals would ever deliberately set out to ‘recycle’ their tax-free lump sum so reducing the MPAA to £4,000 per tax year looks unnecessary.
Too much, too soon
Government statistics show that people are increasingly working later in their lives, and this is supported by the Department for Work and Pensions fuller working lives strategy. It is therefore particularly disappointing that the Treasury should seek to change the rules only two years after the introduction of pension freedoms.
It is likely the majority of individuals tempted to utilise the pension freedoms will be unaware of the potential dangers of a reduced MPAA. Not enough take advice or approach Pension Wise for guidance about their retirement income.
All in it together
The proposed 60% reduction in the MPAA clearly demonstrates a disconnect in joined up government pension policy.
The government is successfully encouraging greater pension saving through auto-enrolment, has enhanced retirement options through pension freedoms and is now focussing on encouraging fuller working lives.
Retirement is no longer a cliff-edge and people have embraced the new pension freedoms, with many accessing part of their pension before they fully retire, so government policy needs to reflect this. But few people realise this comes with a sting in the tail in terms of how much they and their employer can subsequently contribute to a pension once retirement income has been taken using the pension freedoms without incurring a tax charge.
What is needed is joined up policy across government departments to allow those who work longer to be able to continue making pension contributions even if they have accessed some of their pension saving, with realistic checks and balances to prevent obvious misuse. A £4,000 MPAA is a cut too far which has the potential to undermine the widely applauded pension freedoms and auto-enrolment.
Read more about the confirmed cut to the MPAA here.
Correct as of 3/3/17