The Treasury has confirmed that the Money Purchase Annual Allowance (MPAA) will reduce to £4,000, from April 2017 and will be applied retrospectively to the more than 500,000 people who have accessed pension freedoms since April 2015.
The Government says it will publish its full response to the consultation on the MPAA on 20 March 2017.
The move signals the end of the notion of pension freedoms facilitating a gradual shift from work to retirement where individuals over age 55 facing challenges accessing the labour market could dip into their pension and then return to work and build more pension. While this will now be possible, individuals considering withdrawals will have to judge whether they are prepared to sacrifice the majority of their pension allowance for doing so.
It also means people who exercised pensions in the way promoted by former Chancellor George Osborne will face tax charges for being a member of a workplace pension scheme if their total contributions exceed £4,000 a year.
Punter Southall Aspire managing director, DC consultant Alan Morahan says: “We certainly know of instances where employees have flexibly accessed small pension pots but continue to participate in their employer’s pension scheme. Someone with earnings of greater than £40,000 and total pension contributions, including employer contributions, of 10 per cent will now be liable to the annual allowance tax charge. Most will not even be aware of this charge and will inadvertently fall foul of the legislation.”
Scottish Widows head of industry development Pete Glancy says: “It’s disappointing that the cut will go ahead as it will penalise those who need to make use of pension freedoms. Those drawing from their pension will not be able to save more than £4,000 into their pension – that’s a 60 per cent reduction in the amount people can save.
“We estimate that tens of thousands of people will be affected by this change, and especially vulnerable customers who do not have access to professional financial support. It’s vital that we ensure support is available for those who need it, and we must remember that there will be people who have taken some money from their pension already. There’s a big educational job to be done by providers, advisers and public services to ensure that the new rules are understood by customers before they make at retirement decisions.”