The Government appears unclear on the extent of pensions “recycling” it is using to justify cutting the money purchase annual allowance.
In November’s Autumn Statement, Chancellor Philip Hammond announced the MPAA – the annual amount individuals can contribute to defined contribution pensions after having previously accessed flexible benefits – would be slashed by more than half, from £10,000 to £4,000.
The move was defended as a way to stop pension savings being “recycled to take advantage of tax relief”, i.e. to stop those still in work putting money into their defined contribution pensions and drawing out at the same time and saving a 25 per cent tax charge.
The consultation on the cut did not provide precise estimates on how many individuals were taking advantage of this relief, how many would be affected by the cut, or how much tax revenue was generated through breaches of the MPAA.
In response to a Freedom of Information Act request from Money Marketing asking for any estimates or analysis conducted by the Government on how much pension savings are recycled to take advantage of tax relief through the MPAA, the Treasury refers to a policy costings paper from the 2014 Autumn Statement.
The Treasury points to a projected combined cost of introducing the MPAA and new small pots rules of £50m in 2016/17 rising to £120m by 2019/20.
But these estimates pre-date the pension freedoms in 2015, and the Treasury did not provide any further estimates reflecting the MPAA cut announced in the 2016 Autumn Statement.
It could also not provide a precise estimate on the number of people who would potentially be affected by the MPAA cut, saying a “proportion” of those paying more than £4,000 into a DC pension would be affected.
The Treasury sayss: “425,000 people aged 55 or over pay more than £4,000 into a DC pension. A reduction in the MPAA to £4,000 people would only affect the proportion of these people who had flexibly accessed their pension.”
A “best guess estimate”
In a separate FOI request from Old Mutual Wealth, the Treasury said it was “not yet able to identify the number of individuals who are both accessing and saving into their pension”.
Old Mutual Wealth pensions expert Jon Greer says: “Our FOI request reveals the Government’s assessment of the impact of the MPAA is a best guess estimate. Pension freedoms are still in their infancy and the number of people affected by the MPAA is likely to increase in the future. The rule change was targeted at the potential to recycle pension income in order to obtain further tax relief. However, it is the antithesis of flexibility.
“It is not hard to imagine someone in a reasonably senior position reducing work to two or three days a week, taking less pay and topping-up their income with pension withdrawals. As they are still working, they would automatically make pension contributions that could be subject to the MPAA rules.”
The Exchequer expects total benefits from the MPAA cut to be £70m in 2017/18, rising to £75m in 2020/21.
Wingate Financial Planning director Alistair Cunningham says: “I understand the need for an MPAA as it prevents individuals making unlimited withdrawals, and paying them back in benefiting from the tax-free lump sum on the ‘new’ money.
“What I object to is the incessant tinkering – why was it not set to £4,000 initially? This suggests the initial value was an error on the Treasury’s part.”
The consultation on the MPAA reduction closes on 15 February.