Half a million Britons could find they are restricted to pension contributions of just £4,000 a year if the Treasury applies its new Money Purchase Annual Allowance (MPAA) to everyone who has accessed pension freedoms.
The Treasury’s consultation on the reduced £4,000 MPAA for anyone who has accessed pension freedoms is silent as to whether it would only apply to those making withdrawals from April 2017 when the new rules take effect.
But industry experts believe the Treasury could apply the new lower limit to anybody who has accessed taxable benefits through pension freedoms. That would leave an individual earning £50,500 in a workplace scheme with an 8 per cent contribution either having to negotiate their contribution down with their employer or pay a tax charge.
Aviva head of policy for retirement solutions John Lawson says: “The Treasury could do it either way, but I think they will probably go for the £4,000 limit for everyone who has accessed taxable pension benefits. If they don’t they will create a buy-now-while-stocks-last opportunity, and it will be more complex going forward to have two different MPAAs to think about.”
Aegon director, regulatory strategy Stephen Cameron agrees that there is a risk the Treasury might go for a blanket £4,000 MPAA across the board. Cameron says: “There is a strong argument to say that it would be unreasonable for this new limit to apply to people who have already made a withdrawal on the basis they would face a £10,000 MPAA as a consequence. But the Government may say that some in that situation are the people who sought to double dip, so it may look to penalise them for having done so.”
In the first 12 months following the introduction of pension freedoms in April 2015, 300,000 people withdrew cash lump sums, thereby triggering a reduced Money Purchase Annual Allowance for future contributions, according to figures from the Pensions Policy Institute. Figures are not yet available for quarters two and three of 2016, but with the number of pots accessed steadying at around 60 per cent of the levels seen in the initial period after pension freedoms were introduced, there could be around 500,000 people who will have triggered a reduced MPAA by April 2017.
LCP partner Andy Cheseldine says: “It would be outrageous if they made this retrospective. It is bad enough to change it from April – given the risks of people inadvertently causing themselves problems by making a withdrawal without understanding the consequences – but to hit those who have taken benefits under the old rules would be unfair. They would effectively be picking on a bunch of people who are not tax avoiders – why would they do that?”
Former pensions minister Baroness Altmann agrees. She says: “It would be unfair to make it retrospective. If people have accessed pension on the basis they have been expecting to be able to make a £10,000 contribution in future, it would be unfair to take that away from them.”
The Treasury consultation paper argues that only 3 per cent ‘of individuals aged 55+ make DC contributions of more than £4,000 a year, although it is not clear whether this figure includes individuals over state pension age. Experts point out the proportion of DC savers aged 55+ who are contributing more than £4,000 a year into a pension is likely to be significantly greater than 3 per cent.
The Government has been forced to restrict the annual allowance for those accessing pension benefits because of fears of tax leakage. In 2014 Corporate Adviser reported how the pension freedoms policy exposed the Treasury to significant risk of tax and NI loss.
Cameron agrees that the new MPAA will cause problems even if it only applies to those accessing benefits after April 2017. He says: “The main risk here is that people who have a number of pensions may make withdrawals not realising that they are going to severely restrict their ability to pay in. An individual with a number of pots may cash one in to clear some debt or fund some item of expenditure, and then find they have created issues for their future contributions. The proposal emphasises the need for advice before taking pension because an individual could find they have to opt out of their workplace pension or face big tax charges as a result of a withdrawal.
“The Government should join its thinking up with the recognition that working patterns into later life are not as straightforward as they used to be. There will be people working later into their sixties and seventies who may have to rely on their pension at some point. This will restrict their ability to do so.”
Cheseldine says: “Even if it is not retrospective, we think there is massive risk that high earners paying in more than £4,000 may take a few thousand pounds out of their Sipp without realising what it will do to their annual allowance.
“There is a further twist in that ff you take taxable income under a trivial lump sum then you do not lose your annual allowance. But you have to make sure it is designated as trivial, and you can only do it once per scheme.”
Individuals can take trivial commutation if their total pension benefits are less than £30,000 without losing their £40,000 lifetime allowance. They can alternatively take three small pots of up to £10,000 each without triggering the reduced MPAA.