The government has announced a consultation into reducing the money purchase annual allowance (MPAA).
The MPAA currently stands at £10,000 per year though the consultation will look to reduce it to £4,000 per year from April 2017.
In today's Autumn Statement Chancellor Philip Hammond said the measure would ensure users do not benefit from double tax relief.
The MPAA was introduced in April 2015 and is aimed at those over the age of 55 who are drawing down their pension flexibly while continuing to save into it.
The MPAA was intended to prevent savers from taking money out of their pension and then effectively re-investing it and benefitting from a second round of tax relief.
According to the consultation document the MPAA "should be set at a level that focuses government support on those who genuinely need, rather than simply choose, to draw on their savings and who subsequently find themselves unable to re-build their pension."
It further added that currently only 3% of individuals aged over the age of 55 make DC contributions of more than £4,000 per year.
Pitmans managing director Richard Butcher believes the move goes against the ethos of Freedom and Choice.
"I can see why the chancellor has done this but Freedom and Choice is being eroded," he said. "We feel the reduced allowance would act as a disincentive to those people who want to just dip into their fund and take out money as needed. Reducing it by such a large amount is a huge issue."
Nucleus product technical manager, Rachel Vahey agreed saying such a cut could prove detrimental to those needing to access their pension money.
"Pension freedom was all about allowing people to be able to merge their working and retirement lives and doing something like this makes Treasury look like it's talking the talk but not walking the walk," she said. "Reducing the MPAA to £4,000 will curtail people from investing in pensions and we need to look at the different reasons people need to access their pensions. They could be going through a divorce for instance or need to pay debt. If they are taking money out for such things shouldn't they be able to have the chance to rebuild those pensions too?"
Butcher said that a reduction from £10,000 to £4,000 could also have a major impact on saving levels. If someone aged 55 was able to contribute the current £10,000 per year every year until the age of 70 they would accumulate £218,000. Reducing it to £4,000 per year would see this amount decrease to £87,000.
In the case of someone saving between the ages of 55 and 65 then the difference would be that they would accumulate approximately £135,000 at £10,000 a year and just £54,000 at £4,000 per year.
The consultation will run until 15 February 2017 and responses will inform legislative changes taking effect from April 2017. The re-set level of MPAA will be confirmed in Budget 2017.
Responses to the consultation should be sent to [email protected] or in writing to Pension and Savings Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ.
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