Slashed money purchase allowance will reduce savings

Slashed money purchase allowance will reduce savings

The reduced money purchase annual allowance (MPAA), which will be reintroduced in next week’s Finance Bill, is set to further complicate pensions and sends the wrong message about savings, experts have warned.

Sir Steve Webb, head of policy at Royal London, said the government's decision to introduce a reduction in the money purchase annual allowance to £4,000 - down from the current £10,000 - “is wrong”.

He said: “If you want to encourage people to save, this is not the solution.”

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The money purchase annual allowance is the amount a person who has already begun drawing on their pension can pay in one year back into their retirement savings without a tax charge applying.

The government’s goal with this cut is to limit the risk of savers recycling cash through their pension.

However, according to Sir Steve, there is no evidence in the consultation paper about this reduction that the number of savers recycling pension cash is increasing.

The MPAA cut was first announced in November 2016, and was set to be introduced in in the latest Finance Bill in March.

However, a number of changes to tax legislation, include the MPAA cut, were dropped after the calling of the general election in May.

The government confirmed in July that all policies announced pre-election and due to start from April 2017 will be effective on that date.

Which means that the MPAA cut will be applied retrospectively.

The fact that the measure was announced almost a year ago, and it is only now being introduced, “brings uncertainty to savers and advisers,” Sir Steve added.

According to Susan Hill, chartered financial planner at Susan Hill Financial Planning, this situation “has actually held up people making a decision about their financial planning for four or five months”.

She said: “I have said to my clients to hold off any money purchase annual allowance contributions until we absolutely know [what is going to happen].”

Billy Burrows, director of Retirement IQ, said that “although in practice the money purchase annual allowance [cut] will probably not affect many people, those who it will affect may find themselves with a hefty tax bill unless they reduce their pension contributions”.

He said: “This is an unwelcome measure because it sends out the wrong message to pension savers and further complicates pensions. […] For those who want to top up their pensions later in life, the money purchase annual allowance may be an unwelcome obstacle.”

Besides the money purchase annual allowance cut, the second 2017 Finance Bill, which is scheduled to be moved in the House of Commons on Wednesday (6 September), will also include a tax break to employers on pension advice and a reduction in the dividend allowance.