In its consultation response to HM Treasury, Old Mutual Wealth proposes two alternatives.
Proposal 1 - Reduce the MPAA to £7,000 per annum.
An MPAA of £7,000 would make the MPAA roughly 16% of earnings up to the top of the employer national insurance threshold, broadly reflecting the pensions quality mark.
The £4,000 per annum limit could impact on auto-enrolment where an employee joins a new employer who offers a generous auto-enrolled scheme (typically a 10% to 15% contribution level), which the Government is wishing to encourage. In addition, the Government advocates working in retirement as part of the solution to the ageing population and a £4,000 MPAA sends out an unhelpful message to anyone in that situation.
By reducing the MPAA to £7,000 the government would ensure that there are no unintended consequences of the proposals in relation to auto-enrolment. In addition, the limit would be more consistent with the Government’s message on ’fuller working lives’.
Proposal 2 – Maintain MPAA at £10,000 and assess any recycling under General Anti-Abuse Rules (GAAR)
If the Government’s core concern is the number of potential abusers of the re-cycling rules, the issue could be addressed by maintaining the current £10,000 per annum MPAA and assessing any recycling under the General Anti-Abuse Rules (GAAR) in a similar way to the tapered annual allowance.
The GAAR would act as a sufficient deterrent to manage the risk of tax avoidance and could be triggered if:
- it is reasonable to assume that the main purpose of the pension contribution is to re-cycle pension income which the person is receiving; and
- there is a clear link between the pension income received and the amount of the additional pension contribution paid.
- a person moving to part-time employment and supplementing their income by taking a pension benefit flexibly would not be subject to the GAAR; and
- normal contributions to a qualifying auto-enrolment scheme (employer and employee) would not be caught by the GAAR.
The anti-avoidance rule would remove the tax relief given in respect of recycled pension income.
Jon Greer, pensions expert at Old Mutual Wealth says:
“The pension industry continues to be subject to change without considering all the implications.The reduction in the MPAA is another example of making a relatively small change without assessing the wider picture.
“In addition, the limited time period for its introduction provides little opportunity to introduce alternative proposals that could meet the concern of recycling whilst not causing potential issues for the growing semi-retired workforce. These proposals also do not appear to have taken into account all of the work undertaken around people phasing their retirement which the government normally encourages. It would appear to be an example of two Government departments working independently in silos.
“As an industry, we want a long-term strategy to provide confidence in pensions, not plans arguably designed to raise a small amount of extra revenue for the Government.”