The government’s proposed reduction of the Money Purchased Annual Allowance from £10,000 to £4,000 is a policy based on ‘limited evidence’ and the government should ‘think again’.

Chancellor Philip Hammond revealed the Treasury’s plans in the Budget last November and subsequently launched a consultation, which closes today. The proposals were not welcomed by the industry at the time and it was argued that the consultation hinted at the future scrapping of pensions tax relief.

Changes to tax relief are a sore subject for the industry and much like the government’s previous consultation on encouraging people to save more, which suggested a change to the way pensions are taxed, the industry has not been welcoming of its latest idea.

In the consultation document, the government projected that only 3 per cent of the over 55s are likely to pay more than £4,000 in the next tax year. However, an Freedom of Information request by Old Mutual Wealth has found that the government is not able to identify the number of individuals both accessing and saving into their pension. As a result, Old Mutual Wealth claims the government’s assessment of the impact of the MPAA is a "best guess estimate".

Instead, Old Mutual Wealth expects the proposed change would capture people unintentionally, as many good workplace pension schemes have total contributions of 10 per cent or more of earnings. For example, someone earning over £40,000 would breach the proposed new MPAA £4,000 allowance by default if they have taken pension income flexibly.

Old Mutual Wealth pensions expert Jon Greer said the “unexpected announcement” to reduce the MPAA “appears to be a policy based on limited evidence”.

“The rule change was targeted at the potential to recycle pension income in order to obtain further tax relief, but in reality it does not appear to be that great a risk. Our FOI request reveals the government’s assessment of the impact of the MPAA is a best guess estimate.

“The reduction should be dropped or at least put on hold until the government has firm evidence of its impact and implications. As an alternative the government could maintain the current MPAA rule and explore using an anti-avoidance provision to make it clear that individuals found to be recycling pension income, for the main purpose of obtaining a tax advantage, would be subject to penalty.”

Also commenting, AJ Bell senior analyst said the tens of millions of pounds the government expects to raise from cutting the MPAA is “loose change” to them. However, the cut “flies in the face of pension freedoms”.

“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. Furthermore, the rules create an anomaly whereby someone who takes 25 per cent of their pension fund tax-free can use carry forward to pay in up to £160,000, while someone who takes £1 of taxable income can only pay in £4,000.

“It is not just the super-rich who will be affected – large chunks of middle Britain, many of whom might need to catch up for years when they have failed to save, will also be caught.
“Rather than rushing through a tweak to the existing flawed MPAA system which risks further damaging trust in the pensions system, policymakers should hold off any change and work with the industry to build a framework that is simple and sustainable.”

AJ Bell have also written personally to Pensions Minister Richard Harrington on the issue urging the government to delay the reduction and instead consider a more wide ranging reform.

In addition, Nucleus product technical manager Rachel Vahey said Nucleus recommends the government thinks again on the reduction in the MPAA to £4,000. Like AJ Bell, Nucleus is also concerned that the reduction sits at odds with the pension freedoms and encouraging people to work longer.

“Pensions freedom and choice was introduced as a way of helping people merge working with taking some retirement income. Reducing the MPAA doesn’t allow those people to fully rebuild their pension income. It shows on pensions freedom the government is talking the talk, but not walking the walk," Vahey said.

“The aim of the change is to prevent people recycling tax relief. However, no evidence has been presented showing an increase in the level of recycling. Reducing the MPAA will stop some people who have taken retirement income from paying substantial amounts back into a pension to ‘double dip’ on tax relief. But it’s a very blunt tool, and runs the risk of affecting many more people’s retirement plans through ‘collateral damage’.”

From an adviser’s perspective, Suffolk Life head of product and insight Greg Kingston added: “Advisers and their clients are losing confidence in their ability to effectively plan for retirement. From our survey responses, it appears that the people who would be most greatly affected by this change are individuals who have been most sensible with their saving plans. These are individuals who may be affected by sudden unfortunate events – but still see the importance in making retirement provisions for later life, rather than simply relying on the state pension.”

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