Pensions and ISAs
Money purchase allowance change is concern
Sara Wilson, head of platform proposition at Alliance Trust Savings, welcomed preservation of salary sacrifice option for pension savers, but believes reduction in the Money Purchase Annual Allowance for pensions in drawdown may present challenges for some.
“We were relieved to see no major tinkering with ISA and Pension arrangements in this Autumn Statement, and pension savings being spared from the end to salary sacrifice for many other employee benefits in April next year,” she said.
“In time, we would still like to see the Lifetime Allowance for pensions scrapped, rewarding those who have built up considerable savings in their pensions over the years.”
The Money Purchase Annual Allowance is reduced from £10,000 to £4,000. It applies where somebody has accessed their pensions flexibly usually either by taking more than just their tax-free cash under a drawdown arrangement or by taking a slice of their pension fund using the Uncrystallised Funds Pension Lump Sum payment.
Ms Wilson said: “The planned reduction could limit the ability of those still in work and – for good reason – drawing down pension funds (for example to fund a divorce or manage a gradual wind down to full retirement) to rebuild their pots in the longer term. So we are pleased to see the Government plans to consult on this particular issue.”
Fidelity International believes the cut in MPAA could have a significant effect on the availability of pension freedom to many of those in company pension schemes and, perhaps more importantly, may curtail the pension savings of those who have already accessed their pension savings under the new pension freedoms.
Richard Parkin, Head of Pensions Policy at Fidelity International, said: “Many pension schemes will only allow cash withdrawals in the form of lump sum payments where 25% of the withdrawal is tax-free and the rest is taxable as income.
“This was a new way of taking benefits introduced by the government to make it easier for people to take advantage of pension freedom. It is commonly used by pension plans who don’t want to support full income drawdown which includes many large company pension schemes and older pension contracts.
“The problem with this type of withdrawal is that it triggers a reduced limit on what can subsequently be saved into the pension plan. When this limit was £10,000 this didn’t affect too many people but at £4,000 it could really bite.
“While few may be saving £4,000 from their own earnings, the reduced allowance also includes employer contributions which could easily take many over the limit triggering a significant tax bill. This is not only bad news for the individuals affected but will make pension provision more complicated for employers.”
Steven Dicker, pensions partner at PwC, said: “The retention of salary sacrifice for pension contributions is a welcome support to retirement saving. However, with no announcements on the tax relief taper or boosting LISAs, today was a missed opportunity to simplify the labyrinthine rules around tax relief on pension contributions and clarify the overall direction for encouraging long-term saving.
“The only exception was the reduction of the Money Purchase Annual Allowance from £10K to £4K which, while designed to prevent tax relief recycling, was arguably a step backwards for pension flexibility for those drawing their pensions while still working.”
The Chancellor’s pledge to consult on how best to ban pensions cold calling and a wider range of pension scams has been welcomed with cautious optimism, by the director of a leading pensions campaign group.”
Lynne Sneddon, EY Partner, Scotland, said: “If no news is good news, then Philip Hammond’s first Autumn Statement was a good one for the pensions industry.
“We will have to wait for the consultation to learn how the government plans to tackle pensions scams – but moves to clamp down will be welcome and help to boost public confidence in the system.”
She added: “In the small print, there are changes for holders of life insurance investments and pensions in drawdown. Pensioners wanting to contribute to pension pots they have begun drawing down will need to watch out for the Money Purchase Annual Allowance (MPAA) dropping from £10,000 to £4,000.
“But there is better news for people who want to partially surrender a life policy. Previously this could sometimes trigger a tax charge on any capital gain, but now policyholders can apply to have that recalculated on a “just and reasonable” basis.”
Angela Brooks, Director of Pension Life – set up to identify and prevent pension scams, close loopholes in pension law and rescue victims of pension and investment fraud – said: “Pension Life is currently working on rescuing hundreds of victims of £1.7bn worth of lost pension funds. Many of these people were scammed out of their retirement income due to such cold calling practices.”
“The Pension Life team and their many supporters in the industry are very pleased that at long last the government’s shameful policy of inaction appears to have made one small corrective step in the right direction.
“If we’re now heading towards some form of prevention, the government now needs to tackle the problem of the damage this scourge of the financial services industry has caused both in the UK and offshore in the past six years.”