Chancellor Philip Hammond did not reveal any pension surprises in the Budget. Normally, that would be a good thing. But on this occasion, I had been hoping for a U-turn on the reduction to the money purchase
Sadly Hammond has decided to persevere and reduce the MPAA to £4,000, despite objections from the industry.
The measure creates complexity and is at odds with the trends in the retirement savings market and consumer lifestyles in retirement. It is also at odds with the spirit of pension freedoms.
By reducing the MPAA to £4,000 the Government may be inadvertently penalising individuals that want to continue funding pension contributions in their late 50s and beyond after they have flexibly accessed some money purchase income. The reduction takes affect from 6 April 2017, and the Government says there will be no other changes to how it will operate. However I anticipate the alternative annual allowance that will be available for defined benefit accrual will increase to £36,000.
Like most tax changes, however, the MPAA creates planning opportunities. The important thing to be aware of is it is only certain types of pension withdrawal, such as flexi-access drawdown payments, that will trigger the annual allowance reduction to £4,000. Taking tax-free cash will not trigger it, nor will anyone already in drawdown before April 6 2015, provided they remain within capped drawdown limits.
Similarly, payments of up to £10,000 paid out under small pots rules will not trigger a reduction. It is possible to take up to three pots this way with a combined value of £30,000.
Before making a withdrawal from a pension, it is also worth considering withdrawing money from other assets instead, which may be more tax efficient.
Much like the MPAA, the Chancellor missed the opportunity to reverse the extremely complicated tapered annual allowance. It saves only £260m a year, according to Government figures, but creates great uncertainty and complexity for people saving toward retirement.
Such is the complexity that many firms are believed to be applying a cap on contributions to all staff, punishing even those that the legislation was not intended to impact.
One pensions surprise did come in the form of changes to the Qualifying Recognised Overseas Pensions System.
A 25 per cent charge will apply to some overseas transfers from midnight tonight where the transfer is made outside the EEA to a pension scheme in a country other than their persons country of residence. Transfer requests made before 9 March will not be subject to the tax charge, and neither will UK tax-relieved funds currently held in Qrops.
HMRC has confirmed that overseas schemes cannot be a Qrops unless the scheme manager has given HMRC an undertaking that they will operate the new transfer tax charge.
However, HMRC will continue to treat existing Qrops as qualifying until the 13 April 2017, but if they do not receive the new undertaking by 13 April from the overseas scheme it will automatically cease to be a Qrops. Advisers in this area will be advised to keep a close eye on the Rops list.
Jon Greer is pensions technical manager at Old Mutual Wealth