Treasury rejects criticism of MPAA cut

From 6 April, savers will see the allowance slashed by 60% from £10,000 to £4,000 in a government bid to stop savers from "recycling pension savings" and benefitting from double tax relief.

The MPAA cut was confirmed earlier this month in the Spring Budget, but the government department revealed its thinking and rejected criticism in a final response to its consultation on 20 March.

Prior to the Budget, the plans were condemned as "further damaging trust" in pensions and as the "worst kind of policy-making". 

However, in the document the government said it "does not believe that a £10,000 MPAA is appropriate and consultation responses have not provided evidence that changes this view".

It also rejected claims the change would be unfair on those who had accessed their pensions flexibly believing the allowance would remain at £10,000.

The policy will doubly hit those who have made use of the Freedom and Choice reforms, introduced in 2015, as their allowance would effectively be cut from the £40,000 overall limit to the lower £4,000 amount. This is because accessing a defined contribution (DC) pot makes a saver subject to the MPAA rather than the higher annual allowance.

"The government accepts that some individuals may have planned to contribute up to £10,000 a year, but the number in this group is small," the Treasury wrote. "Median [DC] contributions are less than £3,000 for men aged 55 plus and less than £2,000 for women in the same age group."

It concluded it would be "disproportionately complex" to implement differing MPAAs depending on individuals' situations, and said the change to take effect next month would apply to anyone who has or plans to access pension savings flexibly.

Many in the industry have expressed their dismay at the proposal.

AJ Bell head of technical resources Gareth James said the policy was punishing savers for taking advantage of Freedom and Choice.

"The chances of the government performing another policy U-turn were always slim but it is still disappointing that the MPAA cut is going ahead," he said. "It flies in the face of the pension freedoms, where people are being encouraged to use their savings flexibly and yet when they do so they are punished with a drop in their annual allowance from £40,000 to £4,000."

Prudential head of technical Les Cameron added ordinary savers would be caught out by the policy change.

"The government's changes to the MPAA are designed to stop pension savers claiming additional tax relief by drawing money from their pensions and resaving money into other schemes," he said. "However, it will affect many ordinary savers who have accessed their pensions and who will be caught by the new limit.

"Someone earning a national average income and who is a member of a good quality workplace pension could easily be caught out. Some people may have to choose to reduce their pension contributions to avoid the tax charge for breaching the new £4,000 limit."

The lower allowance will come into place on 6 April.

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• Topics
• Defined Contribution
• Law and Regulation
• HM Treasury
• MPAA
• Money purchase annual allowance
• Spring Budget 2017
• Budget 2017
• Gareth James
• Aj Bell
• Prudential
• Les Cameron