The Treasury has admitted its response to the Reducing the Money Purchase Annual Allowance (MPAA) consultation contained figures that incorrectly understated the proportion of pension savers likely to be impacted by the change, repeating an inaccuracy highlighted to them last December by Corporate Adviser.
The original consultation response, posted on the gov.uk website yesterday, claimed only 3 per cent of ‘pension savers’ contribute more than £4,000 a year into a pension, as justification for the introduction of the new £4,000 MPAA from April, even though the figure is likely to be more than double that figure.
But the Treasury has admitted to Corporate Adviser that the 3 per cent figure relates to ‘all individuals age 55-74’, and not ‘pension savers’. With around 90 per cent of 65 to 74-year-olds being retired and not working and therefore not entitled to contribute £4,000 a year, and a significant proportion of 55 to 65-year-olds also not saving, experts estimate the true proportion of pension savers who would be affected by the new MPAA if they choose to exercise pension freedoms is likely to be well in excess of 6 per cent.
The Treasury’s consultation response has repeated the understating of the scale of the impact of the new MPAA just three months after Corporate Adviser highlighted the issue to them. The initial consultation document published in December also claimed only 3 per cent of pension savers paid in £4,000. The Treasury has now amended its consultation response so the 3 per cent figure relates to ‘individuals over age 55’.
In its consultation response, which confirms the introduction of the £4,000 allowance, the Government accepted that the 500,000 people who have used pension freedoms since their introduction in 2015 are disproportionately affected by the lowering of the Money Purchase Annual Allowance (MPAA) to £4,000 next month.
But it says it has no plans to remove this retrospective allowance reduction, arguing that a £4,000 MPAA is ‘an appropriate compromise between the competing interests of preventing recycling, while allowing scope to rebuild some pension savings’, and allowing employer contributions only would simply promote ‘indirect recycling’.
The response explains that the Government decided not to replace the MPAA with controls on tax-free cash on contributions made after a withdrawal as this would be costly and complex, requiring new processes, communications and disclosures.
The Treasury says having different MPAAs, dependent upon when a benefit was last flexibly accessed would be ‘disproportionately complex, both operationally and in relation to disclosure requirements’. It says there would also be a need for transitional requirements for the year in which a person subject to the £10,000 MPAA became subject to the £4,000 MPAA.
The Government also says it will not move to remove unfairness between the DB and DC schemes, saying DB scheme members who have accessed DC pots flexibly will subject to the ‘alternative annual allowance’ of around £30,000.
It rejects concerns that individuals auto-enrolled into a scheme with the PLSA’s Pension Quality Mark Plus accreditation, which requires a 15 per cent contribution of 85 per cent of earnings, will face a small tax charge as the amount payable is insignificant. It adds that the issue is insignificant because there are ‘only’ around 100 PQM Plus schemes.
The consultation response says: “It is common for employers to allow employees to sacrifice salary for an employer pension contribution and a person who accesses their pension savings flexibly is likely to have greater scope for salary sacrifice than would otherwise have been the case. In such circumstances, rather than using their salary to meet everyday expenses and then recycling pension savings, they are able to live off their pension and request larger employer pension contributions. This is, in effect, indirect recycling.”
A Treasury spokesperson says: “The 3 per cent figure relates to all individuals aged 55-74 and the response document has been amended to clarify this point.”
AJ Bell head of technical resources Gareth James says: “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.”
Prudential head of technical Les Cameron says: “The Government’s changes to the Money Purchase Allowance are designed to stop pension savers claiming additional tax relief by drawing money from their pensions and resaving money into other schemes. However, it will affect many ordinary savers who have accessed their pensions and who will be caught by the new limit. Someone earning a national average income and who is a member of a good-quality workplace pension could easily be caught out. Some people may have to choose to reduce their pension contributions to avoid the tax charge for breaching the new £4,000 limit.
“Many people will have flexibly accessed their benefits for genuine reasons, perhaps to help with wedding cots or clearing a debt, with no intention of gaming the tax system but they’ll still be subject to the reduced allowance.”
Old Mutual Wealth retirement planning expert Ian Browne says: “The Government have held on to a proposal that is at odds with the current trends developing in the retirement market and the spirit of pension freedoms. The budget documents show revenue from pension withdrawals was £1.5 billion in 2015-16, substantially more than the £0.3 billion estimate. It’s hard to justify this further tinkering, which may inadvertently penalise individuals that want to continue funding pension contributions in their late 50s and beyond after they have flexibly accessed some money purchase income.”