Pensions changes in the Autumn Statement

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Pensions changes in the Autumn Statement

In the latest Autumn Statement, there were changes to pensions that will affect advisers seeking to maximise tax relief for clients.

There were two specific pensions mentions in chancellor Phillip Hammond's statement - that of reducing the money purchase annual allowance (MPAA) and a pledge to crack down on pension scams and cold calling - and some less-publicised ones tucked away in the supporting documents.

The MPAA

In a 19-page consultation published by HM Treasury alongside the Autumn Statement, the government explained pensions freedoms appears to have created a loophole enabling people to take money out of their pension, while still investing into it tax-free. 

In effect, this allows the individual double pension tax relief.

According to the consultation paper: "Since April 2015, on reaching normal minimum pension age, currently 55, a person can access their pension flexibly and continue to save into a pension.

"However, the risk of acting against the spirit of the system remains and the MPAA was introduced and set at £10,000.

We should be trying to make combining work and drawing a pension easier, not harder.Steve Webb

"While the MPAA reduces this risk, it does not eliminate it. An individual still in work can invest up to £10,000 of their earnings, tax-free, into a pension while also drawing out their existing defined contribution (DC) pension savings.

"Although against the spirit of the tax system, acting in this way reduces an individual’s tax bill by 25 per cent and, at the level of £10,000, this means £1,125 for an additional rate taxpayer."

As a result, Mr Hammond announced: "For pensions that have been drawn-down, I will reduce to £4,000 the MPPA, to prevent inappropriate double tax relief."

Those most likely to be affected are those who are accessing their pension using an uncrystallised fund pension lump sum (UFPLS).

This was a method of drawing pensions introduced in April 2015 to improve flexibility for retirees.

In August 2016, Association of British Insurers (ABI) data suggested 300,000 cash withdrawals have been made using UFPLS in the first 12 months of availability.

 Q2 2015Q3 2015Q4 2015Q1 2016* Total - twelve months since reforms 
Cash withdrawals Just over £1.4bn, average payment size just over £14,500£1.27bn paid out in cash lump sums, with an average payment size of just under £14,000.£860m paid out in cash lump sums, with average payment of just over £12,000. £750m paid out in cash lump sums, with average payment of just over £19,000** £4.3bn paid out in just over 300,000 cash lump sum payments, an average payment of nearly £14,500.

The consultation period on this proposed £6,000 cut runs until 15 February 2017, with an indicated start date for the reduced allowance of April 2017.

However Nathan Long, senior pension analyst for Hargreaves Lansdown, says this proposed cut was counter-intuitive when considering the government's long-term measures to get more people saving for their retirement and reducing the burden on the state.

He comments: "Slashing the contribution limit for those who have already started drawing pension income will simply act as a tax on those needing flexibility in the final years of their working life.

"It also makes part-time working less attractive for older workers, where the government should be doing all it can to prolong our working lives." 

HM Treasury anticipates a £70m annual saving by this measure, but former pensions minister Steve Webb, now head of policy at Royal London, claims the measure is unfair.

He says: "Starting to draw taxable pension cash becomes even more of a cliff-edge than at present. 

"We should be trying to make combining work and drawing a pension easier, not harder."

Who will be caught out?

Hargreaves Lansdown's Mr Long says anyone drawing pension income and planning to pay in more than £4,000 in a year will be caught by this change.

According to Hargreaves Lansdown data from clients, 41 per cent of those accessing UFPLS and therefore triggering the lower Money Purchase Annual Allowance are under the age of 60.

The majority of these people will still be working.

Mr Long adds: "As the rules can be applied retrospectively, anyone who has made decisions to access pension income based on a £10,000 per year limit for new contributions could be sorely disappointed, potentially missing out on not only tax relief but also valuable workplace pension contributions.

"Accessing a pension while still working will become increasingly common either for part-time working or for lump sums required either to avert a crisis like a broken boiler or to help family.

"Assuming membership of a workplace pension requires contributions of 10 per cent, a £4,000 MPAA catches anyone earning over £40,000 whereas currently it applies for anyone earning over £100,000.

"The situation could get worse, with many calling for workplace pension contributions to rise to a minimum of 12 per cent under automatic enrolment.

This would then catch anyone who has drawn pension income and earns more than £33,333 – hardly among the highest earners."

 Earnings at 10% ContributionEarnings at 12% contribution
MPAA of £10,000£100,000£83,333
MPAA of £4,000£40,000£33,333

Moreover, he says a falling MPAA will make part-time working less attractive, catching anyone earning more than £66,667 a year.

 Pro-rata earnings for 3 day week at 10%Pro-rata earnings for 3 day week at 12%
MPAA of £10,000£166,667£138,889
MPAA of £4,000£66,667£55,556

How to advise clients: three top tips

So, what advice should you give clients set to be hard hit by the changes to the annual allowance?

  • Ensure they have savings outside of a pension so they are not forced to draw on it in an emergency. 
  • Avoid drawing an income where possible, and simply drawing the tax free lump sum only.
  • Check the pension provider offers income drawdown. Many workplace pensions do not offer the ability to take just tax-free cash and no income so it might be worth moving your clients' pensions to a provider that can offer full flexibility.

 Pension scams

Also in the Autumn Statement, Mr Hammond promised to crack down on "pensions cold-calling and a wider range of pension scams".

As part of this, the government will consult on ways to ban cold-calling. This move has been welcomed by the pensions industry. 

Yvonne Braun, director of policy, long-term savings and protection for the Association of British Insurers, says: "We are pleased government is taking action to ban cold calling and combat pension scams.

"Cowboys must not be allowed anywhere near people’s life savings and these measures will go a long way to achieve this."

Steve Herbert, head of benefits strategy for Jelf Employee Benefits, says: "The government's move to publish a consultation on options to tackle pension scams, including banning cold calling in relation to pensions, will give firms greater powers to block suspicious transfers and making it harder for scammers to abuse ‘small self-administered schemes'.

"This is likely to be warmly welcomed by all involved with pension provision."

According to Andrew Tully, pensions technical director at Retirement Advantage: "This is really good news as far too many people have already been the victim of pension cold calling.

"The conmen have scammed people out of millions of pounds, from ever more sophisticated approaches.

"The simple rule of thumb continues to be, 'if the opportunity seems too good to be true, then it probably is'. Just put the phone down."

Overseas and specialist pension schemes

The government also announced it will close specialist pension schemes - the so-called Section 615 schemes - to new savings for people working overseas. 

John McCreadie, head of sales (UK) for Momentum Pensions, comments: "This highlights the need for specialist advice for those employed overseas and underlines the need for more action on transparency by providers.

"The industry needs to work together to collectively ensure remaining products are completely transparent with no hidden charges. We all need to encourage advisers and their clients to understand the many benefits of selecting a transparent product that can be as geographically mobile as the people who save into them.

"The criteria for foreign schemes to qualify as overseas pension schemes for tax reasons will also be updated and the tax treatment of funds transferred between registered pension schemes will also be aligned."

The government also intends to review the tax treatment of foreign pensions with the intention of better aligning them with the UK’s tax regime. 

Section 575 of the Income Tax (Earnings and Pensions) Act 2003 provides that only 90 per cent of income received from a Foreign Pension Scheme is classed as taxable income, unless charged otherwise. This may be changed.

Qrops

Meanwhile, qualifying registered overseas pension schemes (Rops) will see an extension from five to 10 years of taxing rights and eligible criteria.

This is to prevent Qrops being misused by anyone looking for a more favourable tax position

The changes will mean the income from a Qrops will be taxed in the same way as a UK pension for anyone returning to the UK – currently only 90 per cent of income from a Qrops is subject to income tax rather than 100 per cent in a UK pensions scheme. 

According to Mr McCreadie: "This is material, as it appears to extend the scope of member payment charge provisions from five years to 10 years non-residency for lump sum payments.

"If this is the case, this would limit the tax exempt lump sum paid to a non-UK resident to 25 per cent, for a period of 10 full tax years, after the year of departure from the UK, to avoid the member being subject to a member payment charge.

"In addition, the government will further update the eligibility criteria for foreign schemes to qualify as overseas pension schemes. Again, details are awaited on this."

simoney.kyriakou@ft.com