Parallel changes to pension drawdown and contributions rules are set to widen an already-massive gulf between defined benefit and defined contribution pension savers, experts have warned.
In particular, the changes would increase the already-extensive opportunities for defined benefit members to recycle pension tax relief, while clamping down on the ability for defined contribution members to do so, they said.
The changes in question are the reduction of the money purchase annual allowance and the relaxation of trivial commutation rules.
The two policies come out of separate government departments, with HM Treasury responsible for the money purchase annual allowance, and the Department for Work & Pensions for trivial commutation.
Under current trivial commutation rules, a member of a defined benefit scheme aged 55 plus can cash in a lump sum of up to £10,000 out of a DB scheme, or more if the lump sum doesn't push the member's total pension wealth above £30,000.
However, in its much-anticipated DB green paper, published last week, the DWP proposed raising this limit.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said while this change would "make sense" in the context of pension freedoms but it would also widen the gap between DB and DC savers.
He told FTAdviser: "It would mean DB scheme members enjoying yet another advantage relative to money purchase scheme members who would be caught by the money purchase annual allowance [MPAA], whilst DB scheme members would be free to draw cash and recycle it at will."
The money purchase annual allowance applies only to money purchase, or DC, savers who have began to draw down on their taxable pension, currently imposing a limit on annual top up contributions of £10,000.
According to plans laid out in last November's Autumn Statement, this is set to go down to £4,000 a year in April.
Members of DB schemes, meanwhile, are able to work full time and take their full DB pension without any limit on DC contributions beyond the standard annual allowance (£40,000 a year for most people).
Ruban Sanmuganathan, a chartered financial planner with Plutus Wealth Management, pointed out that any contribution to a DC scheme would receive full tax relief, according to the individual's marginal rate.
That, he said, meant a DB member could in theory recycle their DB benefits into a DC scheme and claim the full tax relief.
He said people were taking full advantage of this apparent loophole.
"It is still possible for a person who is receiving income from a final salary pension to pay the net proceeds of that into a new pension and receive full tax relief on that contribution," he told FTAdviser.
"I have clients in this situation who are putting in far more than £10,000 per year, let alone £4,000 per year, and are not affected by this rule because they funded the contributions from final salary pensions."
Mr McPhail pointed out that the same could be done with trivial commutation.
Mr Sanmuganathan described the policies as "another example of poor foresight of the government in its tinkering with pensions".
"It is understandable that the government wants to inhibit the moral hazard of people taking advantage of the new pension freedoms by limiting the recycling of pension money.
"However, in doing so, they have created further disequilibrium between those with defined benefit and those with defined contribution pensions."
Royal London's director of policy and former pensions minister Sir Steve Webb agreed that pension rights for individuals favoured DB over DC.
He said he "suspected" the last government had not tackled the issue because it had "picked enough battles" with public sector workers, who make up the bulk of active DB members.
"But in principle it is hard to justify the current inequity of treatment," he said.
According to figures provided by Hargreaves Lansdown, DB pensions take up around 85 per cent of pension contribution tax relief, while only around 15 per cent goes to DC.
The firm's pensions analyst Nathan Long pointed out that there were around seven million active members of DB schemes, compared to around 16 million DC scheme members.
A DWP spokesperson said: "This is a wide-ranging Green Paper that sets out a range of issues and potential measures to consider. No decisions have been made, and before any proposals are put forward we will consider all the evidence and ensure we continue to engage with industry."
james.fernyhough@ft.com
