The government has confirmed its decision to cut the MPAA by 60% from 6 April, arguing the new £4,000 allowance is "fair and reasonable" and will only affect up to 3% of savers over the age of 55.
Announcing the cut in the 2016 Autumn Statement, Chancellor Philip Hammond argued it was intended "to prevent inappropriate double tax relief". The policy has drawn consistent criticism since, however, with commentators arguing it would undo some of the positives introduced through pension freedoms.
The Money Purchase Annual Allowance (MPAA) applies to individuals who have flexibly accessed their pension benefits. The original limit of £10,000 was introduced in April 2015 to stop people claiming further tax relief on any new contributions made to their pots.
While today confirming the cut to £4,000 in its consultation response, the government maintained no more than 3% of savers aged 55 and above would be making pension contributions in excess of that amount a year.
That view had been reflected in documents accompanying the Spring Budget, which showed the expected tax gain for the government being £65m in 2017/1, rising to £70m by 2021/22. These were some way down on the £70m and £75m respectively forecast at the time of the Autumn Statement.
Policy 'needed more time'
Old Mutual Wealth retirement planning expert Ian Browne criticised the government for "forging full steam ahead and leaving us with another example of a policy that needed more time for careful thought".
He added: "It said to abandon the MPAA now and consider a new approach would require too many new processes and it was simpler to just keep the MPAA. Instead of taking time to properly consider alternative routes, it seems it has decided to go down an easier route - even if it is not the right one."
AJ Bell head of technical services Gareth James described the news the government would be pressing ahead with its plans as "disappointing".
He said: "It flies in the face of the pension freedoms, where people are being encouraged to use their savings flexibly and yet, when they do so, they are punished with a drop in their annual allowance."
With just 17 days until the policy is implemented, James added, clients and their advisers were going to have to think quickly about how to adapt to the cut.
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