The Budget has highlighted the huge popularity of the pension freedom changes, with the Government raking in £1.7bn more than expected between April 2015 and April 2017.
While the dash for cash has not materialised on an individual basis as much as was originally feared, the collective withdrawals from pensions has given the Government an eye-watering boost. But, despite this welcome enhancement to the Government coffers, it is pushing ahead with a reduction in the money purchase annual allowance despite widespread industry opposition.
The Government believes there are significant sums being lost to the exchequer by people making use of the current MPAA limit.
The MPAA will fall from £10,000 to £4,000 from 6 April. Crucially it is a retrospective measure affecting not just those who start to take withdrawals in future but people who have used pension freedom between April 2015 and now.
These people accessed their funds in the knowledge they could make future pension provision up to £10,000 a year. But, at a stroke, their future tax-efficient pension payments will be substantially reduced, which seems fundamentally unfair.
The MPAA restricts the payments which can be made to a pension when an individual has “flexibly accessed” their benefits. This includes people using an uncrystallised fund pension lump sum or taking an income from flexi-access drawdown. However, it does not affect those who only access their tax-free lump sum, buy a standard lifetime annuity or take income from a capped drawdown contract within the GAD limits.
The ability for pensions to fit the increasingly flexible approach people have to work in later life is one of the huge benefits of the freedoms. Our most recent wave of research shows 52 per cent of over-50s intend to work part-time in retirement, with 4 per cent expecting never to stop working full-time.
Greater freedom allows people to access their pension pot at relatively young ages if they have a specific need, for example, to pay off expensive debt or to tide people over who have been made redundant, or to meet a gradual move to working fewer hours.
Reducing the MPAA restricts options for people in these kind of circumstances. If they access their pension, future savings are limited. This may also undermine the policy intention of auto-enrolment.
For example, if someone who has accessed their pension joins a new employer offering a 5 per cent employer payment to match the individual’s 5 per cent, then any individual earning above £40,000 would breach the MPAA. This may encourage more people to opt out of pensions at a time we are trying to encourage greater savings.
For those who have already accessed their benefits there is a short window to communicate with customers who are affected and take any action.
Options may include making a pension contribution before 6 April to use up this year’s £10,000 allowance while it is available, as well as considering the best home for future savings.
Those currently using capped drawdown are likely to want to stay in that regime to retain the £40,000 annual allowance and those who flexibly access benefits in future will want to plan carefully.
Andrew Tully is pensions technical director at Retirement Advantage
£65m Estimated tax take from MPAA cut in 2017/18
£70m Estimated tax take from MPAA cut in 2018/19, and in each year until 2021/2022
£4,000 New MPAA limit from 6 April
20 March Date Government will publish full response on MPAA consultation