Although there is no single set of statistics that can be relied upon completely, it is fairly safe to assume over 500,000 people have flexibly accessed some or all of their pensions under the new freedoms.
HM Revenue & Custom’s own statistics show 393,000 individuals received a flexible payment from their pension between April 2016 and March 2017. The previous year’s figures, based on data submissions from only some pension providers, showed 232,000 individuals took a flexible payment. Given the number of individuals that will have received a payment in only one of those tax years, an estimate of at least 500,000 is not difficult to achieve.
As a result of flexibly accessing their pension, every one of those half a million individuals now sees themselves restricted by the money purchase annual allowance.
The MPAA can be criticised for many reasons:
- There is a lack of evidence tax reliefs would be abused to the extent that meant the MPAA was needed.
- A communications regime that relies on pension savers notifying their scheme administrators that they are subject to the reduced allowance.
- A situation where someone who is effectively forced to access their pension – for example, in the event of bankruptcy – is severely restricted in their ability to rebuild their retirement fund.
- The contrast in treatment of someone who just takes their tax-free cash, and so is unaffected by the MPAA, and someone who takes a pound of taxable pension, and so sees the amount they can contribute drop by at least a quarter.
Pre-Budget 2017, it could have been argued that the MPAA level was clear to consumers. Savers affected by the reduced allowance knew, provided they read the notification from their pension provider, that the amount they could pay into money purchase pensions had dropped from £40,000 to £10,000. They also knew that they had lost the ability to use carry forward under defined contribution pensions.
The Budget day announcement of a reduction in the MPAA partly eroded that certainty. Yes, it was made clear the allowance would drop from £10,000 to £4,000. It was also made clear the effective date of the reduction would be 6 April 2017. What was not clarified (with providers under no obligation to write to customers already subject to the MPAA about the change) was how those circa 500,000 people would be told that their allowance had reduced.
The position became even murkier when, shortly after the announcement of the general election, the Government amended the Finance Bill by removing the provisions intended to reduce the MPAA.
This leaves a position where the MPAA is £10,000, there is no legislation in the pipeline to reduce the allowance, but policymakers have confirmed that their plans have not changed and the relevant legislation will be re-introduced as soon as possible after the election.
Two recent adviser polls reported in Money Marketing show the level of doubt as to the most appropriate course of action for clients affected by the MPAA who may wish to pay in more than £4,000.
In the first, one in three advisers said they had no plans to review their clients’ contribution levels. In the other, almost one in five advisers said they would be willing to permit their clients to contribute up to £10,000 on the basis this was the current MPAA.
It is perhaps unsurprising that questions about the level of contributions that can be paid have been asked more frequently than any others in recent weeks.
If a client pays in £10,000 and the MPAA is reduced to £4,000 with effect from 6 April 2017, they will face an annual allowance charge. Rules do not currently allow contributions to be refunded just because the annual allowance has been exceeded.
So, is the obvious answer to recommend only £4,000 be contributed until the legislation is re-introduced? That avoids an annual allowance charge but what happens if the MPAA is only reduced with effect from the date the fresh legislation is enacted? The client potentially loses the opportunity to pay an extra £6,000 – or 150 per cent of their new annual contribution limit – into their pension.
The reality is that a change to the MPAA is likely to involve amending primary legislation, which means parliamentary debate and time to plan. However, can this be relied upon?
One option HMRC should consider is to permit contribution refunds where any of the annual allowances are exceeded. The annual allowance rules are more complex than they have ever been (which is saying something), meaning savers should be permitted to rectify situations where they have not understood the rules.
At least half a million savers are already affected by the MPAA and they deserve absolute clarity on when any change will take effect and the option to put things right if the lack of clarity causes them to pay in too much.
Gareth James is head of technical resources at AJ Bell