Government confirms reduction in money purchase annual allowance

Spring Budget 2016: The government has confirmed that the money purchase annual allowance (MPAA) will reduce to £4,000 from £10,000 in April 2017.

The reduction was first announced by Chancellor Philip Hammond at the Autumn Statement in November 2016.

The money purchase annual allowance applies to those who have accessed their pension savings through the pension flexibilities and then make further defined contribution (DC) pension contributions.

The reduction aims to limit the extent to which pension savings can be recycled to take advantage of tax relief, while still providing scope for individuals who need to access their savings to then rebuild them.

Following the Autumn Statement, the government carried out a consultation in to the MPAA, the results of which will be published on 20 March.

Kate Smith, head of pensions at Aegon, said: “We’re disappointed the Chancellor is continuing with his proposals to cut the MPAA for those who have exercised pension freedoms from £10,000 to £4,000. Only two years on, we’re already seeing the pension freedoms unravelled, based on no evidence that people are deliberately trying to abuse the pension tax system.

“We expect few people will be aware of the risks they’re running by continuing to make pension contributions, once they’ve begun accessing their savings. The approach is inconsistent with the government’s policy of encouraging fuller working lives and will result in many more people inadvertently breaking this limit and having to curtail post age 55 pension contributions, possibly including having to turn down valuable employer contributions under auto-enrolment.”

Chris Noon, partner at Hymans Robertson, added: “The reduction of the MPAA makes no sense in a modern world and remains totally contradictory to the philosophy of pension freedoms. The government will save £70m per annum, but at great expense to those wanting to work part time to supplement their retirement income.

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“It is clear that this move by the government is trying to stamp out recycling pension savings, whereby people could get a double hit to pension tax relief by withdrawing money from their pension and then re-investing it. It could be a hindrance to working flexibly at time when more should be done to support the increasing pension savings shortfalls.

“Retirement is no longer seen as a cliff-edge event. It is a process that takes place over many years. The government should be doing more to help people finance a change in working patterns, as more and more people are beginning to retire with DC pensions and are unable to retire early.  For some, working full time into later years will be a challenge, either for health reasons or because they have care responsibilities, and the ability to stagger retirement will be a necessity.”