By Fiona Tait, pensions specialist
The chancellor’s announcement of proposed cuts to the Money Purchase Annual Allowance means it will be more important than ever to be able to tell your PCLS from your UFPLS
What was in the statement?
Not much. The chancellor spared three sentences to inform us that the Money Purchase Annual Allowance will be reduced to £4,000 from April 2017, and they will consult on the detail1. From the wording of the consultation document we can gather that they are not considering whether the reduction should apply but rather how.
Who will be affected?
|Take PCLS only (FAD)||No|
|Take PCLS and income (FAD)||Yes|
|Exceed GAD in capped DD||Yes|
|Remain in capped DD||No|
|Take ‘small pot’||No|
The MPAA is triggered the first time clients withdraw income from a defined contribution pension plan. Therefore:
- Clients who have withdrawn PCLS only are unaffected (until they do withdraw income)
- Clients using UFPLS or drip-feed drawdown ARE affected (since both contain an element of income)
- Clients who remain in capped drawdown by restricting income withdrawals to the GAD limit are unaffected
- Clients who buy an annuity are also unaffected
The consultation specifically refers to those who have already triggered the MPAA and not just those who will do so in future, from which we can infer that the new limit would apply to both from 2017.
Another issue will be how it will affect the alternative annual allowance for defined benefit savers. As the name implies, the MPAA applies only to DC savings; savers with both DC and DB savings benefit from the full annual allowance of £40,000, of which up to £10,000 may be paid into DC plans, leaving an alternative annual allowance of £30,0002. Following the reduction to £4,000 the alternative AA could be fixed at £30,000 or (more likely, in my opinion) it may effectively rise to £36,000 since only £4,000 can be paid into DC plans.
Putting this in context
According to the consultation document only 3 per cent of individuals aged 55+ make DC contributions of more than £4,000 a year. This is borne out by Royal London figures, which show that only 11 per cent of our income release drawdown clients are still saving at all and the average contribution made by RLI customers in this category is (amazingly) already £4,000.
Based on this it seems that the number of people actually affected by the reduction will be fairly low. Our median contribution is much lower than the average, at £2,700, which suggests a very small number of clients making the maximum contribution of £10,000.
Against this is the argument that many people of this age – 52 per cent of our drawdown customers are under 65 – probably still have at least some earnings and probably should be saving what they can to augment or replace the pension they have already taken. If the government wants to encourage longer working lives, Royal London believes a more gradual approach to retirement will be necessary for many people. A transitional period, when people have accessed but are still saving into pension plans, should therefore be supported, not restricted.
The reduction is proposed to apply from April 2017, therefore:
- Clients should consider very carefully before taking income for the first time after this date and would definitely benefit from taking financial advice before they do so
- Clients who have already triggered the MPAA should make the most of this year’s relief and contribute £10,000 if they can
The consultation period will run to Wednesday 15 February 2017. Advisers can respond via MPAAResponses@hmtreasury.gsi.gov.uk
Or in writing to:
Pension and Savings Team
1 Horse Guards Road
Royal London support
The Royal London Drawdown Governance Service provides data to advisers for all their clients currently taking income from an income release drawdown plan3. We can therefore assume that most, if not all, of those who are doing so have already triggered the MPAA and they should be contacted regarding their ongoing savings.
3 This was the default position. Advisers may choose to add clients who are not taking income or remove those who are but who they choose to monitoring in alternative ways,