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.