The government’s intention to slash the Money Purchase Annual Allowance (MPAA) could hurt consumers and will have cost implications for the pensions industry, experts have warned.
Initially set at £10,000 as part of pension freedoms, chancellor Philip Hammond announced in his Autumn Statement plans to cut the allowance to £4,000 from April 2017.
In its consultation paper released shortly afterwards, the government stated the new allowance is “fair and reasonable” and it “limits the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system.”
Andrew Pennie, marketing director at Intelligent Pensions, said constant tweaks to the pension system could damage public confidence in the savings regime. Mr Pennie said: “It doesn’t encourage people to save, which at a time when pension savings are significantly short, is not the message we want consumers to have.”
The number of consumers directly affected is expected to be low as the MPAA only limits pension funding from those who have crystallised benefits. Mr Pennie explained that consumers purely taking tax-free cash will not be affected. The £10,000 small pots rule can also be used to enable future contributions above the MPAA.
Martin Tilley, director of pensions at Dentons, suggested pension firms would suffer as a result of the change. “It’s probably going to cost the industry more than it’s going to save the government in tax. It’s a minor change, but will actually impact lots of people, simply because every single document will have to be changed.”
Mr Tilley added that firms must make further adjustments if the government confirms implementation before the deadline of 15 February 2017.
Mr Pennie conceded that the MPAA was an easy target for a government looking to constantly squeeze pension tax breaks.
“When budgets are tight and money’s tight, it’s an easy pocket to pinch,” he said.
craig.rickman@ft.com
