In a consultation response to the HM Treasury, Old Mutual Wealth is calling for Chancellor Philip Hammond to reverse the reduction of the MPAA from £10,000 to £4,000.
In HM Treasury’s consultation document, the Government estimated that only 3% of over 55s are likely to pay more than £4,000 next tax year. However, a FOI request from Old Mutual Wealth reveals that the Government is not able to identify the number of individuals both accessing and saving into their pension, so the Government’s assessment of the impact of the MPAA is a best guess estimate.
Old Mutual Wealth expects the proposed change would capture people unintentionally, as many good workplace pension schemes have total contributions of 10% or more of earnings. For example, someone earning over £40,000 would breach the proposed new MPAA £4,000 allowance by default if they have taken pension income flexibly. It is doubtful that such individuals are recycling income to gain a tax advantage.
The change to the MPAA will require additional planning by advisers to ensure that their clients are not hit with a surprising tax bill, but those without an adviser may struggle to appreciate the consequences.
The MPAA is particularly important for the increasing number of people who are taking a phased approach to their retirement. Many people choose to work reduced hours while topping-up their pay by withdrawing some money from their pension*. This flexible combination of salary and savings income is possible thanks to pension freedom reforms.
But the MPAA curbs this flexibility by capping the opportunity to work, save and withdraw pension income in a fluid manner without the possibility of incurring some form of penalty. Ultimately, by prohibiting flexibility through the MPAA, the government reverses some of the benefits of pension freedom reforms and is an ill fit with their ‘fuller working lives’ policy initiative.
*Research from Old Mutual Wealth conducted with YouGov showed that people are increasingly using temporary and flexible work as a way to fund their retirement. The survey showed that 30% of those surveyed expect a job to help fund their future retirement income. These people may need to access their pension flexibly, but may also look to contribute into the pension in periods when their paid income is higher, thereby sustaining their long-term pension provision. If they pay in more than the MPAA, they will be subject to a tax charge that broadly negates the tax advantage given when the contribution was made.
Jon Greer, pensions expert at Old Mutual Wealth says:
“The Government’s unexpected announcement in the Autumn Budget to reduce the Money Purchase Annual Allowance (MPAA) appears to be a policy based on limited evidence. The rule change was targeted at the potential to recycle pension income in order to obtain further tax relief, but in reality it does not appear to be that great a risk.
“Our FOI request reveals the Government’s assessment of the impact of the MPAA is a best guess estimate. It is not hard to imagine someone in a reasonably senior position reducing work to 3 days a week, taking less pay and topping-up their income with pension withdrawals. As they are still working, they would automatically make pension contributions that could breach the reduced MPAA.
“The reduction should be dropped or at least put on hold until the government has firm evidence of its impact and implications. As an alternative the Government could maintain the current MPAA rule and explore using an anti-avoidance provision to make it clear that individuals found to be recycling pension income, for the main purpose of obtaining a tax advantage, would be subject to penalty. Such regulation has been used previously to limit the recycling of tax free cash lump sums.”