The government is under pressure to reverse its decision to cut the Money Purchase Annual Allowance from £10,000 to £4,000, with one provider calling the policy a "an unworkable, complex mess".
The new MPAA, announced in chancellor Philip Hammond's Autumn Statement last year, would limit the amount people would be allowed to contribute to their pension once they had begun drawing down on their taxable pension.
The purpose was to limit use of the MPAA to "recycle" the 25 per cent tax-free allowance through employer contributions.
But Gareth James, head of technical resources at AJ Bell, argued there was no evidence that anyone was exploiting this potential loophole, adding that the policy was "ridiculous and unsustainable", and likely to reduce the public's trust in the pension system.
Richard Parkin of Fidelity, meanwhile, said the plan could wreak more "havoc" with employers than the much-criticised tapered annual allowance.
He also argued that there was no evidence that anyone was exploiting the loophole, and agreed the policy would further damage the reputation of pensions.
As a result, he told FTAdviser Fidelity was "pushing back quite hard on it".
Both argued that the policy would reduce the freedom to mix working in later life with drawing down on their pension, at a time when more flexibility was needed, not less.
"The MPAA was introduced by the government to reduce the risk of people using the pension freedoms to cut their tax bills," Mr James said.
"The theory was that savers could divert their salary into their pension, receive tax relief, and then withdraw up to 25 per cent tax free.
"We have seen no evidence that our customers have shown any interest in this kind of re-cycling and nor has the government produced any evidence of this behaviour occurring."
Mr Parkin agreed.
"We can't see much evidence that people are recycling money," he said, adding: "I think Treasury is more concerned about the idea people are doing it than the reality."
He said rather than reduce the MPAA, the government should ban the practice of recycling - though he conceded this would be "quite hard to administer".
He pointed out that the MPAA would cause problems with employers, who may not be aware when an employee had drawn down on their taxable pension - especially if it was separate from their own workplace scheme.
As a result they could unconsciously breach the £4,000 a year limit.
Mr James pointed out that the rule also required an unrealistic level of consumer awareness.
“The proposals ... rely on member engagement that doesn’t exist. Government rules require savers affected by the MPAA to communicate with other pension providers if they start saving elsewhere.
"Based on our own experience, this communication just does not happen. Designing an MPAA system that not only requires individuals to engage with a communication sent to them, but which is also reliant on them remembering to take a particular action – potentially many years down the line – is a recipe for disaster," he said.
In its submission to the government's consultation, AJ Bell urged the government to set the MPAA "at a level which is fair for all – enabling those who have accessed benefits the opportunity to rebuild their savings where this proves necessary, but removing the opportunity for others who have accessed benefits to continue to pay in six figure contributions".
The government's consultation on the new MPAA will close next week.
james.fernyhough@ft.com
