The consultation on the Money Purchase Annual Allowance has not provided evidence to change the view of the government that the £10,000 allowance is not appropriate.

In a response document, published today, the government confirmed that from 6 April 2017, the MPAA will be reduced to £4,000, with the changes effected through the Finance Bill 2017. The level will apply to anyone who has already accessed savings flexibly, or does so in the future, irrespective of when that occurred. However, it said the MPAA will be kept under regular review.

“The government set out in the consultation that it believes that a £4,000 MPAA is fair and reasonable, and will only affect up to 3 per cent of savers over age 55. It allows people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so, while limiting the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system,” the response stated.

The government noted that some respondents to the consultation suggested that recycling should be controlled through an alternative mechanism to the MPAA. However, it said when originally considering how to guard against this risk in 2014, other approaches were considered, such as not allowing a pension commencement lump sum in relation to funds attributable to contributions made after benefits had been accessed flexibly.

However, the government stated that due to prior discussions with stakeholders, it does not think other options are suitable and to abandon the MPAA now and consider a new approach would require new processes, new communications and new disclosures.

Therefore, the government believes that refining the MPAA is a simpler and more appropriate way forward.

Commenting, AJ Bell head of technical resources Gareth James said: “The chances of the government performing another policy u-turn were always slim but it is still disappointing that the MPAA cut is going ahead. It flies in the face of the pension freedoms, where people are being encouraged to use their savings flexibly and yet when they do so they are punished with a drop in their annual allowance from £40,000 to £4,000. The change is now just 17 days away so companies are going to have to think quickly about how they communicate with hundreds of thousands of customers who have been told they have a MPAA of £10,000. Some of these people are going to have to quickly rethink their pension planning for next year.”

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