“I can’t change the direction of the wind, but I can adjust my sails…”
If a week is a long time in politics, two months feels like a lifetime.
In October I wrote about the various restrictions that could apply to your pension contributions, specifically the Annual Allowance, the Money Purchase Annual Allowance and the Tapered Annual Allowance. I should know better than to write about pensions just before big speeches by the Chancellor. Needless to say, things are set to change again.
I watched the Autumn Statement through my fingers, nervous as ever that any number of objectionable pension-related rabbits could be pulled out of Mr Hammond’s hat. Thankfully pensions only came up three times; once to announce a ban on pension cold calling, once to confirm that (quelle surprise) the State Pension triple lock is in the cross-hairs and, finally, to announce a review of the Money Purchase Annual Allowance. Nobody but ambulance-chasers will mourn the passing of pension cold calling, whilst the review of the State Pension triple lock is too embryonic to pass meaningful comment, so it is the review of the Money Purchase Annual Allowance (MPAA) that’s the focus for today.
If you’ve already forgotten what the MPAA is, fret not – you’re in good company. The day after the Autumn Statement even the Daily Telegraph’s Money section got it embarrassingly wrong, incorrectly stating that the reduced allowance would apply to all pension savers (at least those in money purchase schemes). The MPAA, unlike the regular Annual Allowance, only applies to people who have flexibly accessed their pension funds since 2015. For everyone else, the normal Annual Allowance of £40,000 still applies. I can see why the Telegraph journalist got confused – the name is ambiguous at best.
In his speech, Mr Hammond announced that there would be a consultation on whether the MPAA should be reduced from £10,000 to £4,000 with effect from 6 April 2017. If the proposal goes ahead it would mean that people who have accessed their pensions via the new flexibility rules would only be allowed to make further contributions of £4,000 a year to money purchase pensions. I wanted to be indignant at this but I am struggling, mostly because I think it is entirely reasonable. The MPAA was introduced to stop people recycling pension money for the sole purpose of avoiding tax. You earn money, you pay it into a pension, you take the money out again with 25% tax-free then you do the same again the next year, and the year after, and the year after. In this manner you can reduce your income tax bill by 25% throughout your working life. Neat, but unacceptable to HM Revenue & Customs (HMRC) of course. The current MPAA still allows you to recycle £10,000 a year, which could save each tax-payer up to £2,500 (notwithstanding any fees that might be associated with this exercise).
Reading the Consultation Document it is clear that HMRC still feels there’s too much room for abuse. Only 3% of people aged 55 or over pay in more than £4,000 into a pension each year and the current MPAA limit of £10,000 is 3 or 5 times higher than the median contribution for men and women respectively. It’s hard to disagree, therefore, that £10,000 is probably too generous. The Consultation Document asks two questions; 1) whether a reduction to £4,000 would harm the automatic enrolment initiative and 2) whether any particular group would be disproportionately impacted? I can’t see there being much objection on either count so I believe this change will get pushed though. The consultation closes on 15 February 2017 with a view to a decision being announced in the Spring Budget. The timing is quite tight but I would always favour a short consultation over no consultation. Let’s thank heavens for small mercies.
My only lingering worry is that the Treasury has again highlighted the fact that, of the £48bn tax relief handed out to pension members in 2014 and 2015, two thirds went to higher and additional rate tax payers. This imbalance has always been an HMRC bugbear. Before the Budget I commented that there might be some moves to redress the balance in favour of basic rate tax payers and, whilst nothing was announced in November, I really do feel that the writing’s on the wall. Will we see corrective legislation in 2017? I doubt even Philip Hammond knows the answer to that one yet. In the meantime, keep calm and carry on.
We’ve just had the Autumn Statement and thankfully pensions didn’t come up a huge amount in that. There were three key areas that were talked about.
Firstly there’s going to be a real crackdown on pension cold-calling, which we think is going to be a really positive change. There’s too much out there at the moment going on targeting people with quite often low values, telling them they can access it in different ways and it is almost always to the detriment of the member.
They also talked about the…they’re going to review the pension triple-lock that applies to the state pension, this is where the state pension will either increase in line with wages, with inflation or at 2.5%. For a long time it’s felt like that’s quite an unsustainable promise to be making, so we think that a review is probably overdue.
The other area that they’ve looked at was the, what we call, the Money Purchase Annual Allowance (MPAA). This is the amount of money people can pay into a pension after they’ve flexibly accessed their money, and the idea is really to stop people recycling pensions. So, you take some earnings that you have got, you pay it into a pension and then you take it out of the pension again but 25% of the amount you’d get back out is tax free, so it’s a good way of flushing earnings through a pension and saving tax. Now, obviously HMRC is not terribly happy about that.
So in the past we’ve had the money purchase annual allowance at £10,000, there is a consultation open until February the 15th next year, where they’re looking to bring that £10,000 limit down to £4,000. Now, the view that I’ve had previously is that £10,000 is a reasonable level. On reflection I think that actually £4,000 is not unreasonable. 97% of the population pay in less than £4,000. If you think about it against the median wage in this country at about £27,000 it represents about 15% contribution – again there are very few people in the UK who pay 15% into their pension, so I don’t see it as having a major impact and it probably will help, to a reasonable degree, to stop some of the abuses of the tax relief that the government is worried about.
I think it’s one of those things that they can make a small change, if it saves some tax then it’s probably worth doing. It’s not a big change that’s going to upset the electorate so it’s not going to cause difficulties for the Tories going forwards, but if it’s a stroke of a pen to change it from £10,000 to £4,000 and it saves, £10 million let’s say - it’s a stroke of a pen worth having.
It is possible that flagging it up will encourage people who weren’t previously minded to take this loophole – the thing I would say is that I think not many people will really want to go through the hassle of actually doing this. The amount of you save versus the complication of actually going to the trouble of putting the money into the pension, setting it in a pension that allows you that sort of flexible access. Doing that year after year is probably going to be more effort than it’s worth for a lot of people. There’s also some expense involved as well – most pension companies would charge you extra for providing the kind of pension that allows you flexible access, so I think a lot of people would just say you know what, for £4,000, for the tax saving on £4,000 it’s not really worth the bother.
If you haven’t already flexibly drawn I think it is worth looking at your total pension savings, seeing whether you’ve built up enough in your fund at that point, and then if you haven’t, to really think about maximising contributions before you go into that flexibly accessed pot. Once you’re there, restricted to £4,000 you may well find it’s quite difficult to then build up a meaningful pot again.
The Government was looking to try and protect people in certain situations by setting the limit at £4,000. In theory they could have just banned it entirely, they could have just said if you’ve flexibly accessed your pension, you can’t pay anything into a pension anymore. What they were trying to do was help people, for example, who maybe got divorced and lost part of their pension scheme in the divorce. They wanted to give those sort of people who maybe had previously flexibly accessed, the opportunity to still build up some of their fund.
Obviously for those people it’s a little bit too late – they would already be subject to the £4,000 limit but, we would always encourage people who have not yet taken their money to just think about maximising the contributions that they can afford, take advantage of the tax advantages that still exist.
You never know what’s round the corner with pensions. The Chancellor mentioned in his speech that he was still concerned about the £48 billion that is spent by the Exchequer every year on pension tax relief, particularly that £32 billion of that £48 billion goes to higher rate tax payers. Now that’s always felt a little unfair…the Chancellor will say that he feels it’s unfair. Whether he really believes that or not is another matter. But, what they’re really trying to do is target the lower paid basic rate tax payers, non tax payers – they really want the tax relief to go to those groups who probably are in slightly more need of actually building up their pension funds.
Particularly for higher rate tax payers, we may well see something coming through next year which further restricts the tax relief available on pension contributions for them. Again, another good reason to really maximise contributions while they can now.
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