Half a million people who accessed their pensions flexibly since 2015 will be hit with a reduced annual allowance of just £4,000, the Treasury has confirmed.
Treasury officials have confirmed to Corporate Adviser that the new reduced money purchase annual allowance (MPAA) for anyone accessing taxable pension benefits in a DC plan will apply retrospectively to everyone who has accessed a cash lump sum since April 2015, even though the MPAA stood at £10,000 when they made their withdrawal.
A Treasury spokesperson says: “The new MPAA will apply to everyone who has drawn benefits flexibly. There is no transitional protection – retention of £10,000 MPAA – for people who accessed benefits flexibly before April 2017.”
Advisers have reacted angrily to the revelation, saying retrospective rule changes make it difficult for individuals to be able to plan for their future if they are uncertain that the goalposts may be moved at a later date.
The new rules, set to come into effect from April 2017 following a consultation that closes in February, will mean that an individual who has accessed pension flexibly in a way widely promoted by government officials, will be restricted to a £4,000 annual pension contribution for the rest of their life. This would mean an individual earning £41,000 in a 10 per cent scheme, or £51,000 in an 8 per cent scheme would be faced with tax charges for being a member of their workplace scheme. The consultation does not ask for views on whether the new MPAA should be applied retrospectively.
Public sector workers and other DB savers will be allowed to continue to accrue pension benefits worth £40,000 a year, even if they access AVC or Sipp benefits through pension freedoms.
The Treasury had argued that only 3 per cent of people make contributions of more than £4,000 into DC pensions. However, it has confirmed to Corporate Adviser that this figure represents the proportion of all people aged 55 to 74, whether or not they are saving in a pension. Of the 14.1m people aged 55+ in the UK, 422,000 are making contributions of more than £4,000 a year into DC pots.
A Treasury spokesperson says: “The analysis considers all individuals aged 55 – 74, whether or not they are active pension savers and whether or not they have accessed pension savings flexibly. Of these, around 3 per cent are expected to have total contributions, including those made by an employer or third party, into DC pensions worth over £4,000.”
In the first 12 months following the introduction of pension freedoms in April 2015, 300,000 people withdrew cash lump sums, thereby triggering a reduced Money Purchase Annual Allowance for future contributions, according to figures from the Pensions Policy Institute. HMRC figures show 475,000 individuals accessed pension flexibly in the six quarters following April 2015, although there may be some duplication in these figures.
Wealth for Women founder Mary Waring says: “This is atrocious – people should be able to make decisions on the basis of the information available to them at the time. How can anyone do any financial planning if the rules can change retrospectively?”
Willis Towers Watson senior consultant David Robbins says: “This will create a headache for employers as they will not know whether employees have already accessed pension freedoms in a way that means they are no longer entitled to contribute into their scheme at the full rate.”