The money purchase annual allowance (MPAA) affects individuals who have accessed their UK pension savings flexibly – it restricts further tax-free contributions they can make to defined contribution registered pension plans.
A change of tactics
The original MPAA introduced in 2015 was £10,000. Just two years later the Government’s response to its MPAA consultation, issued on 20 March 2017, has confirmed that the MPAA will be reduced by 60% to £4,000, with effect from 6 April 2017.
It is clear from the Government’s consultation response that the primary driver behind the change is to limit the extent to which pension savings can be recycled to take advantage of tax relief. However, the Government’s analysis shows that only 3% of over 55s pay more than £4,000 into a pension plan, so the number of people affected by the MPAA will be very small. We would query whether this change is adding unnecessary additional complexity into the already complex pensions regime, with little up-side.
Crucially, the goalposts have been moved for members who have already accessed their pension savings flexibly on the understanding that the MPAA would be £10,000. The Government has confirmed that there will be no transitional protection for these members because to apply different MPAAs, dependent upon when a benefit was last flexibly accessed, would be disproportionately complex, both operationally and in relation to disclosure requirements. However, we are already seeing some trustee boards facing communication challenges where members have accessed their pension benefits flexibly as a result of being notified of those flexibilities by the trustees.
It is also clear that the new MPAA introduces another round of administrative complexities and cost for pension plans as booklets, information and education documents/websites will have to be updated. Members who have already accessed their benefits flexibly may not be aware of the MPAA change and trustees may want to consider notifying these members so they are not caught out by the reduction in the MPAA.
An own goal?
There is likely to be a rush before 6 April to use the £10,000 allowance by people who had not been considering such high contributions previously. This perhaps defeats the purpose of the legislation as this will cause a tax cost to the Government rather than a tax saving in the short term.
In the spirit of the game
Finally, we would query whether reducing the MPAA is sending the right message to savers. More people are retiring in a more flexible way, supplementing their reduced working with withdrawing their pension benefits. The new legislation will make it harder for members who wish to continue pension savings for the future, should the opportunity arise for them do so after they have accessed their pension savings flexibly. Is this fully in line with the spirit of “freedom and choice”?
As ever, if you need any advice on how this issue affects your pension plan, please contact us.