The government’s second finance bill has provided clarity on a number of pensions issues, including a reduction of the money purchase annual allowance, but experts are concerned that some people are still likely to suffer adverse consequences.
Cutting the MPAA was among a number of measures omitted from the first Finance Act 2017 when the snap general election was called in April this year.
It may further confirm the perception that pensions are seen as fair game for government tax grabs
John Gordon, Ashurst
The second finance bill, which was published on September 8, has now confirmed plans to cut the MPAA from £10,000 to £4,000 with retrospective effect, from April 2017.
The bill also confirmed that the government has resurrected the increase in the employer tax-free exemption for providing advice in the workplace.
This measure is also backdated to April, and means that savers will be able to access £500 from their pension savings tax-free up to three times before they reach the age of 55 in order to pay for financial advice.
Government tax grabs
John Gordon, pensions counsel at law firm Ashurst, noted that the confirmed cut to the MPAA, "while not a surprise to the pensions industry, will still… have adverse consequences for a number of people”.
He added: "It may further confirm the perception… that pensions are seen as fair game for government tax grabs.”
For a number of years the government has had concerns over pensions recycling, where savers benefit twice from tax breaks by withdrawing and reinvesting their pension, or avoid tax on current income by channeling it into their pension and withdrawing 25 per cent tax-free.
It said that reducing the allowance from £10,000 to £4,000 will limit the extent to which pension savings can be recycled to take advantage of tax relief, but experts have been sceptical over whether this was actually happening on a significant scale.
“There is a view in the industry that this concern is possibly not founded on hard evidence, and may be more of a theoretical risk than something that we’re seeing happening in practice,” said Gordon.
Rachel Vahey, product technical manager at wrap platform Nucleus, also noted: “We never really received the evidence… of this actually happening.”
Welcome clarity
It is quite difficult to gather evidence on how many people are recycling, Vahey said, but it is unlikely to be happening very much.
She said it is a shame that that there has been so much confusion over the MPAA cut over the last few months, “but at least advisers and their clients now know exactly where they stand and exactly what the annual allowances are for this year”.
She noted that some people may now have paid in more than £4,000, because they were not sure whether it was going to be a £4,000 or £10,000 allowance.
Kate Smith, head of pensions at provider Aegon, also highlighted that “there will be some people who are caught short”.
“They will have made contributions greater than £4,000 a year, and as a result they’re going to get a tax bill,” she explained.
Industry accuses Treasury of lack of data to justify £4k MPAA
HM Treasury’s consultation on reducing the money purchase annual allowance closed in February 2017, drawing fierce criticism that the policy lacks data to back up its introduction and could unfairly hurt savers.
Tax-free advice for employees
The £500 of tax-free advice for each employee, as confirmed in the new bill, has been increased from £150, and was one of the recommendations set out by the Financial Conduct Authority’s Financial Advice Market Review.
The fact that the finance bill has confirmed the introduction of the allowance is “really good news”, said Smith, adding that “it’s encouraging that the government does seem to be seeing the value of advice in the workplace”.
"[We’ll] wait to see what happens next… whether employers will respond,” by providing access to advice for their staff, she noted.
