How advisers would reform the MPAA

How advisers would reform the MPAA

Advisers have responded to the OTR's call for a review of the money purchase annual allowance by giving their take on what a reform should look like.

The Office for Tax Simplification last week (October 10) urged the government to review the MPAA amid concerns of its “potential for disproportionate outcomes”.

The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.

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The allowance was cut from £10,000 to £4,000 in April 2017, amid concerns it would entice savers to recycle cash through their pensions.

Advisers have various ideas of what the government should do with this policy with proposals ranging from exempting auto-enrolment scheme contributions, or reinstating the previous £10,000 limit, to scrapping the allowance altogether.

Fiona Tait, technical director at Intelligent Pensions, said the MPAA was an outdated concept in that it failed to recognise that retirement patterns were changing with many people now opting to reduce their working hours rather than ceasing to work altogether.

She said: “In this scenario they may well require income from their pension to top up reduced earnings, but also recognise the need to keep saving for their long term future. This behaviour should be encouraged rather than penalised.”

According to analysis from Aegon the reach of the MPAA is widespread. The provider calculated that individuals earning £30,000 who, alongside their employer, are contributing sums equivalent to 14 per cent of their salary to a money purchase pension, would be caught by the MPAA if they entered drawdown.

One of the solutions proposed by the OTS would be to exempt contributions from auto-enrolment schemes, and salary sacrifice schemes that qualify for auto-enrolment, from counting towards the MPAA limit.

Ms Tait supported this idea, saying “this is a situation in which the individual may have lower awareness of their savings, and it could give comfort to employers in the knowledge that their actions are not prejudicial to their employees”.

She added: “My suggestion would be to exempt both auto-enrolment and defined benefit contributions which are generally dictated by someone other than the member.”

Steve Carlson, chartered financial planner at Cardiff-based Carlson Wealth Management, noted the MPAA was a "draconian anti-avoidance provision brought in to prevent a minority of people recycling pension income to get more tax relief”. 

He said: “I suspect there have been more innocent people who have unwittingly been caught by the MPAA. 

“A fairer and arguably simpler solution would have been to extend the existing pension commencement lump sum recycling rules to cover taxable pension income.”

Pension recycling is where a pension commencement lump sum, or flexible pension income, is recycled back into a pension as a tax relievable contribution.

For Claire Trott, chartered financial planner and head of pensions strategy at St. James’s Place, the MPAA “is unnecessary and adds extra complexity to those wanting to access their funds”.