With the government's consultation on a 60% cut to the MPAA this April closing today, Rachel Vahey calls for a stay of execution - at least until better evidence can be collected on how people are actually using pension freedom
Whisper it quietly but last November's Autumn Statement could almost have been labelled boring - were it not for the announcement reducing the Money Purchase Annual Allowance (MPAA).
The Treasury wants to cut the MPAA from £10,000 to £4,000 from this April but the arguments backing up its case are a little shaky. It says it is concerned too many people are ‘double-dipping' on tax relief - in other words, taking benefits out of pension schemes just to reinvest them again and earn another 25% tax-free portion.
With the advent of pension freedoms, many more people are accessing some of their pension cash at the same time as contributing to their current plans. And so, the government believes the likelihood of recycling pension benefits is increasing. The MPAA was originally introduced to put a stop to that sort of behaviour by putting a limit on how much someone could contribute to a pension once they had ‘flexibly accessed' their benefits.
Two years after the introduction of pension freedoms, however, the government does not believe a £10,000 MPAA is needed or appropriate on an ongoing basis and, while it says it doesn't want to reduce the level of ongoing contributions to nil, it does intend to reduce it to £4,000.
We have concerns about this intention. Cutting the MPAA to 40% of its original level is a drastic measure. It sits at odds with the key government policy of encouraging people to work for longer. Pension freedoms was introduced - at least partly - as a way of helping people to merge reduced working hours with taking some of their pension income.
So retirement, instead of being a cliff edge becomes a gradual transition. Yet cutting the MPAA stops people from truly achieving this aim. And it shows that, when it comes to pension freedoms, although the government is talking the talk, it is not walking the walk.
Although cutting the MPAA will stop some who want to recycle pension benefits from doing so, the risk is it disrupts many others' pension planning through ‘collateral damage'. There are many examples of where people choose or need to access their pension pot, but also want to continue saving to rebuild the fund.
They could want to move to part-time work, or may have been made redundant, or may need to access the funds to help clear debt or finance a divorce. These people have no intention of abusing the system. Instead, they just want to access their own money - as promised by the government.
This is also a retrospective measure. People who have already triggered the MPAA cannot now ‘un-trigger' it - instead they find they are subject to the lower limit, throwing a large spanner in some people's pension planning.
Pension freedom unknowns
Although we have had pension freedom for nearly two years, very little is known about how it has really affected people. HMRC statistics tell us £9.2bn has been withdrawn from pension plans. But we do not know the detail backing that headline.
We don't know why people took the money or what they did with it - whether they spent it, reinvested it or stuck it under the bed. We don't know if they took it from their main pension pot, or if they just encashed a small pot they built up years ago. We don't know if they are working full time, part-time, or not at all. And, importantly, we don't know if they are continuing to contribute to a pension and if their contributions went up as a result of accessing their cash.
What is more, neither does the government.
We urge the government not to go ahead with the reduction in the MPAA. Before it jumps to ‘solutions', we should gather better evidence on how people are using pensions freedom. In doing so, the government can identify areas of concerns - and that could be people choosing to recycle their pension benefits.
If the government is really determined to take action, then we recommend instead of cutting the MPAA - which is a blunt tool and risks damaging many people's pension planning - it tightens up the current rules on recycling. Establishing a link between taking pension benefits and increasing contributions is the fairest way of stopping potential recycling.
Although it is now only a few weeks until the start of the new tax year, there is still time for the government to award a stay of execution and not reduce the MPAA. Instead, let it gather the evidence, establish what the problem is - and then devise the right focused solution.
Rachel Vahey is product technical manager at Nucleus
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