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‘Totally unfair’: What pensions industry makes of cut to money purchase annual allowance

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Former pensions minister Steve Webb is among the key pensions industry figures to speak out against government plans to cut the money purchase annual allowance on defined contribution schemes.

The MPAA – the annual amount individuals can contribute to defined contribution pensions after having previously accessed a pension flexibly – will be slashed from £10,000 to £4,000 from April next year, the Chancellor announced in the Autumn Statement today.

Webb says: “Cutting this allowance flies in the face of efforts to make retirement more flexible. As soon as someone draws a pound of taxable cash using the pension freedoms, the amount they can save in a money purchase pension would be slashed from £10,000 to £4,000. This will have a profound impact on their ability to go on working and contributing worthwhile amounts to a pension. Starting to draw taxable pension cash becomes even more of a cliff-edge than at present. We should be trying to make combining work and drawing a pension easier not harder.

“We also need to know what will happen for people who have already drawn taxable cash expecting to be able to go on saving £10,000 per year. Any retrospective change would be totally unfair to savers.”

Dentons Pension Management director of technical services Martin Tilley agreed that the MPAA cut was unwelcome because of the added complexities it added to the system.

“This change is unlikely to produce significant Treasury revenue and is an unnecessary tweak, where at this juncture none was required. The number of booklets and information and education documents/websites that will now have to be rewritten will likely cost more to the industry than any gain in revenue to the Treasury.”

The government defended its proposals in a consultation paper released alongside the Autumn Statement. Only 3 per cent of individuals aged 55 and over make DC contributions of more than £4,000 a year it said, and higher earners would be prevented from recycling tax gains.

The consultation reads: “As more people become pension savers for the first time and as automatic enrolment contribution rates increase, the cost of income tax and National Insurance contributions relief will increase. The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”

The government said everyone over 50 with DC savings should seek guidance from Pension Wise, and it will keep the MPAA under regular review to make sure it does not impact on automatic enrolment.

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. “The government said everyone over 50 with DC savings should seek guidance from Pension Wise, and it will keep the MPAA under regular review to make sure it does not impact on automatic enrolment”.

    Yeah, that ought to do it…

  2. We have got till 15 th February 2017 to respond
    If all adviser did make comments we may influence this decision

  3. I’m sure there’s some mathematical formula at play here but my immediate reaction is that this will make it less likely for individuals to draw on their pensions, therefore reducing tax take on the income?

    Martin Tilley is spot on and therefore it looks like within a 2 years of the ‘new’ MPAA, we’re potentially facing a pre-2017 MPAA and a post-2017 MPAA. Who ultimately benefits from tweaks like this???? Not the client and hardly the Treasury.

    Brilliant.

    I just don’t get why there is a constant need to change pension legislation. Has the Treasury not heard of ‘right first time’ as an approach.

  4. Unfair? Absolute balderdash.
    1. 5 years ago there wan’t pension freedom at all.
    2. If you want to contributer why acess your pension in the first place? Have a little fiscal discipline.

    This is a storm in a tea cup and whinging for the sake of it. What is unfair is the cap and the annual allowance for those on higher salaries.

    Overall I see that as ever the patricians say one thing and do the opposite. Hammond said (words to the effect) that he wanted people to save more. So what does he do? Spends like Kim Kardishan on Speed. Our debt is now scheduled to be about 33% more than our GDP. What a legacy! What an economy – still based on encouraging people to spend what they don’t have.

    Oh we have a fast growing economy. Based on spending. And of course any bad news asscociated with Brexit is ‘défendu’.

  5. Well, lets just consider this for a moment, anyone earning under £43,240 pa funding at 9% to pensions will not be effected (£3,891.60). Does this 9% figure sound any alarm bells?

    So what has effectively been implemented is higher rate earners will be made to reduce their contributions if they have triggered the annual allowance . The Government is saying it does not want to give 40% tax relief.

    We all know the 40% relief is on borrowed time, salary sacrifice very much against the wall, so actually nothing I was not expecting, just attacked in a different way.

  6. Total income to the taxpayer given is £70m pa (rising to £75m) as the quote in the article says this is likely to cost the industry more than that to rewrite and reprint literature (we only printed a retirement guide a couple of months ago and this is now needing to be updated and reprinted) and website material. A complete waste of everyone’s time.

  7. The pace of change with pensions in particular and no doubt other products to follow – behind the scenes work going on to change bonds – means that giving advice has to be front loaded with caveats. The recent pension liberation rules meant a virtual re write of how to give advice particularly if a client politely agreed that they would die before age 75. The motivation here may be to limit tax relief but the tampering and especially the almost arbitrary death benefit rules pre and post 75, feature as much bigger issues as both create uncertainty and do not allow for structured planning. It would be better to eliminate higher rate relief altogether and create rules of a hard and fast nature that attaches to a “contracts” terms upon which a client could rely upon for their planning. The current situation of looking to second guess and hedge bets in case of legislative change, is a poor second best to reliable and structured life planning.

  8. Trevor Harrington 24th November 2016 at 9:34 am

    What he is saying is that there is too much abuse of the system …
    Some people are taking their tax free cash ….. and then feeding it back into their pensions in order to get the tax relief at 40% all over again …

    He is simply limiting the scope for this type of abuse … sorry fraud … which the rest of us are having to pay for.

    I am happy.

    • Trevor, there are also some people who having retired may realise they either do not have enough money to live on, or like the thought of returning to work. Is it fair to penalise these people who may want to save more into pensions?

      The whole idea of Pension Freedoms was to acknowledge the gradual process from working to retirement, and make it possible for people to start to wind down as they get older. This measure just adds unnecessary complexity, if we are concerned about pushing the boundaries of tax legislation we should be going after the likes of Philip Green not the man in the street.

      • Trevor Harrington 24th November 2016 at 11:24 am

        Morning Sanjay,
        Unfortunately, it is always the case that the few do indeed get penalised by such changes, which are necessary to reduce abuse of the system perpetrated by wealthy fraudsters who want to take unfair advantage …. indeed … Philip Green may well be an example of that, although I have no evidence to confirm that point …. just intuition …..
        The fact remains that it is against the law to take a pension fund tax free cash sum and then feed it back into your pensions.

        • But at the same time it’s perfectly legal as a Director of a Limited company to give yourself a salary equivalent to personal allowance, pay it all into a pension plan as an employee contribution and pocket the tax relief.

          There are many ways of dissauding wealthy people not to abuse our pensions system, one way could be to revoke any right to accrual of PCLS after a certain age say 55. This should apply to higher earners only.

  9. Just a quick thought (not really considered it from every angle), but what if tax relief on post-drawdown drawdowns was given at the same rate it had been taken? It would be tax neutral if no additional PCLS was granted… Seems sensible, if workable.

  10. Trevor,

    1) Taking PCLS does not triger the MPAA.
    2) HMRC already has rules concerning the re-cycling of PCLS. It is not illegal if you do not break the rules.

    • Trevor Harrington 29th November 2016 at 9:36 am

      Quite so Terry – thank you for your accuracy.
      The point still remains that if people are going to take money from their pension, it is obviously unacceptable for them to claim tax relief in feeding it straight back in again, and in that sense I think we can all see the Chancellor’s objective.
      If it ain’t right …. it ain’t right.

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