Govt pushes ahead with cut to money purchase annual allowance

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The Government has confirmed it will press ahead with the controversial reduction in the money purchase annual allowance from £10,000 to £4,000.

A consultation on the move was launched following the Autumn Statement last year.

The £4,000 MPAA will come into effect next month, and will apply to all individuals who have accessed their pension flexibly, regardless of when they accessed it.

The cut to the MPAA attracted criticism among the pensions industry, which argued the move went against making pensions more flexible.

Retirement Advantage pensions technical director Andrew Tully says: “The wide scale pension changes introduced from April 2015 were designed to give people much more freedom over how and when they can withdraw their pension pot.

“This restriction to the MPAA is a significant restriction to that freedom. People will need to carefully consider before they take benefits if there is a possibility they or their employer may want to make future pension contributions above a relatively low limit of £4,000 a year. However people’s circumstances change so it isn’t always possible to know what the future may hold, and this change greatly restricts that ability to alter plans as you move through retirement.”

Old Mutual Wealth pensions technical manager Jon Greer says: “The MPAA reduction will make planning for retirement tricky for some.

“In particular, it will damage the savings plans of those that have planned a phased retirement. Where an individual stays in some form of work toward the end of their career but decides to top-up their income with a pension income withdrawal, their ability to continue funding will be curbed to some extent.”

Greer adds a better measure to reduce the risk of pension recycling would be a general anti-abuse rule.

He says: “This would prohibit abuse of the pension tax system through recycling exercises designed solely to take advantage of a tax arbitrage. Similar anti-avoidance rules have been applied to tackle tax avoidance without creating onerous rules that discourage good financial planning.”