The Treasury is wrong to stop people who trusted in pension freedoms from saving for their retirement says Corporate Adviser editor John Greenwood
“The biggest pension reforms in a generation are on their way – and how you use these new freedoms is up to you”. These were the words of a George Osborne piece in the Daily Mail in March 2015, just weeks before the General Election.
Their political purpose long-since served, Philip Hammond has wasted no time in plugging the massive holes in the pension system his predecessor had left open. This needed to be done. But the way in which he is doing it looks set to unfairly penalise people who took Osborne’s pension freedoms at face value. Some will even need to leave their workplace pension scheme or face a tax charge.
Around half a million people – nobody knows the exact figure as the numbers have not been collected in a uniform way – have enjoyed the pension flexibilities on the basis that they will incur a reduced £10,000 annual allowance. The Treasury is now moving the goalposts for these people, arbitrarily cutting their annual allowance by more than half, to £4,000 a year, even though many of them will have drawn benefits for the most innocent of reasons. Many of them are already retired and will never contribute again, but a significant proportion will wish to do so.
The Treasury might argue that it had said all along that concerns about tax leakage, that the Government was not prepared to admit before the General Election, mean that the MPAA was always under review and therefore anyone using pension freedoms should understand there was a risk this could happen. But in the real world, people have been sucked into drawing pension because their Chancellor, and those around him, told them they could. Osborne’s plan was clearly to maximise the political capital of the unsustainable dream of loads of tax relief and loads of flexibility until the election was out of the way, and then sort it out later.
Chickens are now coming home to roost. Not all of those still working who have used the flexibilities are recyclers. Many have drawn pension to clear debt, buy a conservatory or pay for their kids’ education, in precisely the way the Chancellor and others told them they could. Now, if they earn £41,000 and have a 10 per cent scheme, they will be hit by a tax charge for saving through their workplace pension scheme. How can this possibly be fair?
What’s worse is that the civil servants who thought up this rule change can access their AVCs or Sipps and still accrue £40,000 a year worth of pension benefit into their gilt-edged DB plan.
The Treasury seems to think it can hide the scale of the problem by fudging the numbers. Particularly misleading is the way the Treasury tried to tell us that these changes affect only a handful of people. Just 3 per cent of over-55s pay more than £4,000 a year into a DC arrangement, says the consultation.
But on closer examination it turns out that this 3 per cent figure is the proportion of everyone between the ages of 55 and 74 – not of pension savers. No matter that nine out of 10 of those age 65 to 74 are not working and therefore unable to contribute £4,000 a year. Nor that many of those who are in work will be saving in DB schemes or not at all.
I understand completely the need the £4,000 MPAA – I argued strongly back in 2014 that the pension freedoms as written were unsustainable. We can’t do without it. And the sad but unavoidable reality is that, even after April 2017, some people will make flexible withdrawals without realising they are condemning themselves to a future of low pension saving.
But what I fail to understand is how the Treasury thinks it can take the axe to the future of people who did what the Chancellor of the day told them they could. By applying this new MPAA to those who took benefits in good faith, thinking they would have a £10,000 annual allowance in future, Hammond is surely making more enemies than the money saved merits.