Chancellor Philip Hammond has used his Autumn Statement to cut the money purchase annual allowance in more than half.
The MPAA – the annual amount individuals can contribute to defined contribution pensions after having previously accessed a pension flexibly – will be slashed from £10,000 to £4,000.
The cut will come in to force in April 2017. The government said it would consult on further detail on the plans.
Hammond said the decision was taken “to prevent inappropriate double tax relief.”
In a consultation released alongside the Statement, the government says: “The government believes that an allowance of £4,000 is fair and reasonable and should allow people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so. Importantly, however, it limits the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system. The government does not consider that earners aged 55 plus should be able to enjoy double pension tax relief i.e. relief on recycled pension savings.”
The Treasury anticipates it will make £70m from the move in 2017-18, rising to £75m by 2020-21.
Nucleus product technical manager Rachel Vahey called the change “very disappointing.”
“This decision means that it will be tougher to achieve true flexibility in retirement. This makes it harder for those who want to merge working later in life with continued pension saving for their future.
“However, it is worth pointing out that the £4,000 money purchase annual allowance level is less than half of contributions that can be paid into an Isa from next April. Pensions have specifically been designed as a long-term savings vehicle and the government should be encouraging everyone to save as much as they can into a pension plan.”