On the day of last year’s Autumn Statement, HM Treasury launched a consultation paper on reducing the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000 with effect from 6 April 2017.
The paper itself was relatively short, and posed only two questions:
- Do you agree that a £4,000 MPAA would minimise re-cycling pension savings and that, coupled with ongoing monitoring, the new MPAA will allow the continued successful roll-out of automatic enrolment?; and
- Is there any evidence that setting the MPAA at £4,000 would impact disproportionately on particular groups?
Well, yes, by very definition a reduced MPAA will restrict the amount of new contributions that an individual who has ‘flexibly accessed’ some or all of their money purchase pension benefits can make, going forward. Indeed you could almost picture Sir Humphrey Appleby of 'Yes, Minister' fame standing over Mr Hammond, condescending look on face, explaining that “If you ask the question in this way, minister, you will manufacture support for the conclusion you have already drawn”.
However, there is scant evidence for the implication within the consultation paper that a significant proportion of individuals in this particular group are only concerned with deliberately maximising the ‘double tax relief’ that is available from actively recycling their pension income as new contributions.
Significant tax abuse?
"To propose a reduction in the MPAA of this magnitude suggests that significant tax abuse is currently taking place within the new pension freedoms landscape."
To propose a reduction in the MPAA of this magnitude suggests that significant tax abuse is currently taking place within the new pension freedoms landscape. And yet the statistics set out in the consultation document hardly serve to demonstrate this.
We are told that, “only 3% of individuals aged 55+ make [money purchase] contributions of more than £4,000 a year” and that the current MPAA of £10,000 is more than three and five times the average [money purchase] contributions made by men and women respectively, within the same age group.
This is hardly symptomatic of rampant abuse of the pension tax rules taking place, and yet the proposition to reduce the MPAA will affect everyone who has either already triggered, or who are about to trigger, the MPAA, as well as forcing irritating changes to the systems, processes and documentation of pension providers like ourselves.
In our response to the consultation, we challenged HM Treasury to prove that there actually is a problem before getting into any solutions.
Stop tinkering with the pension tax rules!
Constant amendment of the pension tax rules does not help in either promoting simplicity, or controlling costs. And the estimated annual saving in tax relief to the Treasury of £70 million, by introducing the reduction, pales into insignificance, when measured against the cost of tax and National Insurance contributions relief on pension savings of around £48 billion for the 2014-15 tax year. What is more, we suspect it also pales compared to the cost of all UK pension administrators amending their systems, processes and literature and communicating the changes to all their pension scheme members – although that cost is borne by the members rather than the Treasury, of course.
This continued tinkering with pension tax rules by successive Governments, does nothing to maintain trust in pensions amongst the UK population, and renders the concept of 'Pension Simplification', ushered in by ‘A-Day’ in 2006, almost laughable.
Auto-enrolment a success
By contrast, the roll-out of automatic enrolment from 2012 has, to date, been a success.
And, in setting a figure of £4,000 per year for the reduced MPAA, we assume that HM Treasury have taken into account the statutory increases in minimum contribution rates to 5% in 2018 and 8% in 2019.
And one can clearly envisage the media ‘fall-out’ that would result from an individual employee suffering an excess annual allowance tax charge, as a result of actively participating in a workplace pension scheme – as is the Government’s wish with auto enrolment – simply because their, and their employer’s, contributions in a particular tax year exceeded the prevailing MPAA.
One clear way to “allow the continued successful roll-out of automatic enrolment” is to therefore leave the MPAA at its current level, rather than reduce it to an amount that carries with it the risk of unfairly penalising employees who are diligently saving into a workplace pension scheme, and benefiting from a (potentially generous) employer contribution.
The answer to the second question is a much easier 'yes'.
Reducing the MPAA by £6,000 contradicts Government policy to encourage people to work for longer, (as is indeed now happening).
Helping people to ease into retirement
"It is yet another example of a disproportionate Government action impacting upon those who are not guilty of recycling their pension income as new pension contributions."
‘Pension freedoms’ was partly introduced to enable working people to ease into retirement over a period of years by reducing their working hours, whilst drawing some of their pension income, in order to maintain their standard of living over that transitional period.
Reducing the MPAA, however, restricts people from achieving this objective.
It is yet another example of a disproportionate Government action impacting upon those who are not guilty of recycling their pension income as new pension contributions – because they are using that income to maintain their lifestyle, whilst they gradually increase their non-working hours over a period of time.
Freedom to access pension funds
In addition, there are also examples of individuals choosing, or needing, to access their pension fund, but who also want to continue saving, in order to rebuild the fund.
These include individuals who may have been made redundant, or who need to access their funds to clear debts or pay off their mortgage, or to finance a divorce.
Such individuals have no intention of abusing the tax system. They just want access to their own money, on their own terms, which the ‘pension freedoms’ promised them they could do.
Other people affected
Other 'particular groups' that would be affected by the significant reduction would include those that are self-employed, small business owners, those ‘making up for lost time’ with their pension funding, and those who encounter unexpected (and potentially expensive) circumstances; for example, ill-health.
Unnecessary and complicated?
Their ability to save for their eventual retirement, in addition to just relying on the state pension, (access to which is continuing to drift out to ever higher ages), will be frustrated by this potentially unnecessary and complicated reduction in the MPAA, and – as per the conclusion to Question 1 above – we therefore urge the Chancellor to leave the MPAA ‘as is’ and not create a situation where it becomes all too easy for individuals to trigger the MPAA, and thereby limit their future pension contributions to just a tenth of the Annual Allowance.
The outcome of the consultation will be announced on Budget Day (8 March). One hopes that the Chancellor will be in problem-solving, not problem-creating, mode as he rises to the despatch box.