Proposed cut in MPAA to £4,000 is a retrograde step say actuaries

Advisers and industry experts have slammed the government’s proposed cut in the Money Purchase Annual Allowance from £10,000 to £4,000. The Institute and Faculty of Actuaries (IFoA) says reducing the Money Purchase Annual Allowance (MPAA) could have unintended consequences:

  • reducing MPAA could act as a barrier to save
  • annual fluctuations in MPAA and other allowances could lead to consumer confusion and mistrust in the pensions system
  • reducing MPAA could disproportionately impact certain groups of individuals.

HM Treasury's priority should be to strengthen the incentive to save (as it stated in its 2015 consultation on the taxation of pensions). The IFoA believes that yearly fluctuations in the levels of allowance, such as the MPAA or the annual or lifetime allowances, can leave savers confused and create mistrust in the pensions system.  A three or five yearly comprehensive review of such allowances might be more appropriate.

Reducing the MPAA could disproportionately impact groups for whom the changes are not intended. For example, those who stop working because they are sick, or need to care for a sick relative, and therefore need to supplement their income through accessing their pension, but then need to return to work at a later date to rebuild their pension pots, usually at an accelerated rate.

Finally, the IFoA suggests that the government should consider developing an approach that aims to identify the ‘recyclers’ – i.e. earners who seek to take advantage of double pension tax relief, rather than focusing on the MPAA amount.

No short-term changes

Fiona Morrison, immediate past president of the Institute and Faculty of Actuaries, comments: “While we support the focus of HMT’s 2015 consultation, on strengthening the incentive to save, in this instance we would encourage HMT to avoid making short-term changes at the expense of a long-term approach to pensions policy. We believe that the planned reduction in MPAA could have unintended consequences, and so call on HMT to re-examine the potential benefits of this policy, compared to the potential risks of unforeseen outcomes.”

The Association of Consulting Actuaries also points out that some employers use existing schemes to fulfil their AE duties; or have introduced a scheme that is more generous than minimum AE levels. The MPAA reduction would mean that some employees joining/continuing in such a scheme will face an AA charge each year. Such employers might need to consider introducing an option for individuals to choose to have contributions capped to less than the normal level that would be paid on behalf of or by the member, if they are to be kept within the MPAA. If not (assuming individuals do not want to opt out of full pension accrual and effectively forgo part of their remuneration) individuals will need to understand the MPAA and meet the reporting and paying requirements for the AA charge. This is not just an issue confined to for “high earners”: we could easily envisage some of such employees being within the 20% tax band of income.

Loose change

Tom Selby, senior analyst at AJ Bell, says: “The proposed cut to the MPAA is expected to raise tens of millions of pounds.  This is loose change in Government spending terms but the cut flies in the face of the pensions freedoms. 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.

“Furthermore, the rules create an anomaly whereby someone who takes 25% of their pension fund tax-free can use carry forward to pay in up to £160,000, while someone who takes £1 of taxable income can only pay in £4,000.

“It is not just the super-rich who will be affected – large chunks of middle Britain, many of whom might need to catch up for years when they have failed to save, will also be caught.

“Rather than rushing through a tweak to the existing flawed MPAA system which risks further damaging trust in the pensions system, policymakers should hold off any change and work with the industry to build a framework that is simple and sustainable.”

Pensions World is the leading monthly magazine for pensions professionals published by LexisNexis.