The cut in the money purchase annual allowance appears to offer very little in the way of benefit to justify the disruption to providers, advisers and, most importantly, the retirement plans of those affected, says Jessica List.
In the end, the Autumn Statement was almost completely uneventful for pensions.
Almost.
As I sat there on 23 November, listening with baited breath for mentions of tax relief, the last thing I expected was an announcement about the money purchase annual allowance (MPAA).
I am not sure about rabbits out of hats, but it seems Philip Hammond isn’t too bad with sleight of hand. The announcement was slipped seamlessly in between salary sacrifice and tax evasion – so quickly it could have been an experiment in subliminal messaging. For a moment, I thought I might have imagined it.
When I started writing this blog, almost immediately after the announcement, I had not made up my mind what I thought of it. It wasn’t indisputably good news, but how bad was it going to be? It was only as I started reading the consultation and thinking about who could be affected that an opinion began to form.
Of course, it is rather annoying to have yet another minor tweak to the rules. Or, more specifically, a negative minor tweak. We do not mind small changes when they are helpful to investors – such as the amended definition of a dependant earlier this year, which helps child beneficiaries in drawdown. It is a different story, however, when the change means another potential pitfall to avoid.
Both the Chancellor and the consultation paper make the thinking behind this change clear – it is not right for over-55s to receive ‘double tax relief’ by recycling their pension savings, or by redirecting their income through a pension. Well, fair enough. That is not what the pension freedoms were designed for.
As I read further through the consultation paper, however, I started to grow a little confused. The paper states that only 3% of over-55s contribute more than £4,000 a year to defined contribution schemes. It also says that the current MPAA is several times more than the median contribution levels for the age group. Presumably these statistics are meant to reassure us this is a minor change that will affect very few people.
And yet I couldn’t help but wonder – if so few investors are contributing anywhere near the current MPAA, then why do we need a crackdown? If the government is saying that we need to stop over-55s from abusing the tax relief system, shouldn’t there be statistics demonstrating this is currently happening?
My worry is it will be people trying to operate fairly within the rules who end up losing out. I have heard a lot of discussion about investors who access their pension in an emergency or who have to stop working temporarily, and later are in a position to contribute again. Is £4,000 a year enough for those investors to replenish their savings? Of course it depends on their circumstances and how much of their pension they withdrew, but inevitably the answer for some will be ‘no’.
Small pots
My thoughts also went to a slightly different group of investors. One of the highlighted advantages of the freedoms was the ability to withdraw a very small pension, perhaps accrued from a short period of employment, without the hassle and expense of transferring it to a new provider. Some of those pensions will have been withdrawn as small pot lump sums – which do not trigger the MPAA – but what about those investors who used flexi-access drawdown or uncrystallised funds pension lump sums or ‘UFPLSs’?
It is conceivable a good number of those who used this flexibility are still working and contributing healthy sums to their pensions, for whom the MPAA reduction would be a considerable blow to their plans. But if the government concludes it is unfair to change the MPAA for those who have already triggered it, we are back in the headache-inducing territory of transitional arrangements. Is there another pair of words that creates such a sense of dread for those in the pensions industry?
Overall, it is hard to see the point of this change. The statistics in the consultation paper suggest there is no tax relief abuse to quell. The projected savings for the government do not seem particularly substantial. There appears to be very little benefit to justify the disruption to providers, advisers, and most importantly, the retirement plans of those affected.
Jessica List is pensions technical analyst at Suffolk Life
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