The planned reduction to the pension money purchase annual allowance could lead to financial hardship for certain individuals
The CIOT’s Low Incomes Tax Reform Group (LITRG) has voiced concerns that the government’s planned reduction to the pension money purchase annual allowance (MPAA) could lead to financial hardship for certain individuals and risked promoting a “disjointed savings policy to the public”.
Rules introduced in April 2015 enabled individuals to access defined contribution pensions according to their needs. The MPAA serves to restrict “tax-relieved contributions to a pension when someone has already accessed their pension savings and wishes to make further payment”, the LITRG said. The reduction in MPAA to £4,000 a year from £10,000 will “limit the extent to which individuals who have already accessed pension savings can recycle this cash back into pensions”, and claim double tax relief.
In its consultation document, the treasury estimated that the MPAA reduction will affect fewer than 3% of savers, however the LITRG has warned that this figure could be inaccurate, as it is too early to predict the impact that pension freedoms and the Lifetime ISA will have on savings patterns. The LITRG has therefore recommended a review of the £4,000 limit every three years.
The reform group also said that the government risked promoting a “disjointed savings policy”, as benefiting from double tax relief (which the MPAA reduction aimed to prevent) was possible if individuals used a Lifetime ISA from April 2017 and at age 60 moved the money into a pension.
The LITRG argued that in cases where individuals exceeded the £4,000 allowance, they should be able to pay the tax due from the fund in order to prevent financial hardship. Compliance guidance relating to the MPAA was “inadequate”, the group added.
Robin Williamson, technical director of the LITRG said: “Maintaining a reduced money purchase annual allowance is preferable to an absolute prohibition on any reinvestment into a pension. But reducing it to £4,000 from April 2017, which equates to savings of £333 a month, is very likely to catch out people of limited means who, for example, may have taken a pension lump sum to repay their mortgage or debts, then reinvested their new-found disposable income towards their retirement.
“Clear warnings as to the limit on further pension savings must be given in official and pension company guidance, and the potential tax charge if the MPAA is exceeded.”
“Some of the guidance on the MPAA currently provided on various government websites is disjointed, inadequate and potentially misleading. We urge that this is reviewed as a priority, before the reduction in MPAA from April 2017; and that it is kept under review as the programme of change for public financial guidance develops,” he added.
The MPAA reduction applies from April this year.