HM Treasury’s consultation on reducing the money purchase annual allowance will close on Wednesday, drawing fierce criticism that the policy lacks data to back up its introduction and could unfairly hurt savers.
Experts said the small amount of increased tax revenue that could be delivered by the policy did not justify the disincentive towards saving in later life.
The MPAA was designed to stop people withdrawing and then reinvesting their pension, thereby receiving two rounds of tax relief. Some have seen its introduction in the context of a wider plans within the Treasury to dismantle the current pension tax system.
I get a sense that there are people in the Treasury who are on a long-term glidepath that will involve further dismantling of the tax breaks around pensions
Tom McPhail, Hargreaves Lansdown
In his Autumn Statement last year, chancellor of the exchequer Philip Hammond announced the government’s intention to reduce the allowance from £10,000 to £4,000.
Would anyone notice?
Despite the widespread criticism of the planned policy change, experts are divided over whether the new allowance will impact a significant number of savers.
“While working patterns are no doubt changing, the vast majority of clients still view their pension as something to access at retirement,” said Alex Brown, wealth management director at wealth manager Mattioli Woods.
He said while many would access their uncrystallised funds pension lump sum while still working in some capacity, they would be unlikely to continue contributing to a pension after accessing it.
Treasury analysis of the proposed reduction suggested that this impact would be observed outside of the wealthy demographics who can afford wealth managers.
In all it said that about 3 per cent of all individuals over the age of 55 were expected to make total annual contributions of £4,000 or more.
Treasury under fire over data
However, the response to a freedom of information request submitted by Old Mutual Wealth showed that the Treasury only had “limited data” on those who had taken advantage of freedom and choice, prompting industry criticism.
“Our FOI request reveals the government’s assessment of the impact of the MPAA is a best guess estimate,” said Old Mutual Wealth pension expert Jon Greer, who called for the reduction to be dropped until better evidence is available.
“It is not hard to imagine someone in a reasonably senior position reducing work to three 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,” he added.
A Treasury spokesperson said: “We have already published a thorough impact assessment on reducing the money purchase annual allowance and are currently consulting on the change, as announced at Autumn Statement.”
Threat to flexible retirement
Where analysis of post-pension freedom habits has been carried out, evidence points to the MPAA being more widely used than first thought.
Analysis of Hargreaves Lansdown clients who had taken a lump sum revealed that 41 per cent were under the age of 60, meaning they would be quite likely to contribute again to their pension.
And a Suffolk Life survey found that 87 per cent of advisers surveyed had clients who had taken tax-free cash, but expected to make further contributions at a later date.
Such a muddied picture around the policy’s impact means there is a real risk of disproportionately hurting savers and demands a moratorium on change until further evidence emerges, according to Tom McPhail, head of retirement policy at Hargreaves Lansdown.
“Leave it at £10,000 and in the fullness of time let’s have a sensible conversation about how we can address this and other issues,” he said.
Extra tax take would be ‘small beer’
The Treasury’s consultation suggests that savers who would be affected by the reduction could top up their pension savings with an Isa.
“I do get a sense that there are people in the Treasury, and perhaps in government as well, who are on a long-term glidepath that will involve further dismantling of the tax breaks around pensions,” said McPhail.
Chancellor proposes ban on cold calling, refrains from pensions tax overhaul
In his first and last Autumn Statement, chancellor Philip Hammond swapped the timing of the Budget and the Statement, but had comparatively little to say about pensions for now; one of the larger measures – a consultation into pensions fraud – was welcomed by the industry.
Ultimately, the majority of criticism of the MPAA reduction is grounded in the fact that the move is not expected to deliver significant savings for the Treasury, at just £70m a year from a total pensions tax relief bill of around £48bn.
“These estimates are invariably overestimates,” said Ian Neale, director at policy specialist Aries Insight, adding: “This [£70m] is really small beer.”
He praised the Treasury’s decision to consult on the proposed changes before implementation, but questioned the thought process behind the policy itself.
“It’s as if policy people at the Treasury had been charged with coming up with something,” he said. "It's just another example of the government making little tweaks to legislation without properly contemplating and investigating the impact."
