As detailed on this website at the time, a consultation was launched in connection with the Money Purchase Annual Allowance, following the Chancellor of the Exchequer’s Autumn Statement speech on the afternoon of Wednesday 23 November 2016.

The Money Purchase Annual Allowance, or MPAA for short, is the maximum pension contribution able to be received by an individual after ‘flexibly accessing benefits’. The consultation re-iterated the intention, as confirmed by Mr Hammond, to reduce this from £10,000 currently to £4,000 from April 2017.

Flexibly Accessing Benefits

The MPAA is only triggered by flexibly accessing benefits, which includes:

• Taking pension income in the form of Flexi-Access Drawdown (not just receiving the tax-free cash)
• Taking a flexible annuity – an annuity that allows payment to go up and down (not a guaranteed standard annuity)
• Taking an uncrystallised funds pension lump sum, which is a payment from a scheme that 25% tax free and 75% taxed as income (not small pots of less than £10,000)

The government’s concern, despite their promises for ‘pensions freedom’, is that individuals who have flexibly accessed benefits will then look to recycle these benefits as pension contributions and receive the associated tax relief. To counteract this they established the MPAA, which they are now looking to further reduce to £4,000.

It’s not the Annual Allowance or the Tapered Annual Allowance

The MPAA should not be confused with the Annual Allowance, despite the similarity in the name. The Annual Allowance is remaining at £40,000 for the 2017/18 Tax Year, with higher contributions potentially able to be received for those with Carry Forward (the ability to utilise unused Annual Allowance from the three previous Tax Years).

Not everybody, however, is able to utilise the full Annual Allowance. Those individuals with income in excess of £110,000 per annum can see contributions limited, on a sliding scale based on their income, to £10,000 per annum.  Those affected by the Tapered Annual Allowance, as this is known, however are still able to utilise Carry Forward, unlike individuals who are subject to the MPAA.

The consultation

The consultation only asks two questions and they relate to the impact the reduction to £4,000 would have on recycling, automatic enrolment into workplace pension schemes and whether it would impact disproportionately on particular groups of individuals. We have assumed from this that the change will happen, and from the words used in the consultation, that it will affect those already subject to MPAA as well as those entering MPAA after 6 April 2017.

Flat Rate Tax Relief?

Currently tax relief given on individual pension contributions is reflective of the income tax paid by the individual. If you are a basic rate taxpayer, basic rate tax can be reclaimed on personal pension contributions up to your taxable earnings in the tax year, with personal pension arrangements (including our SIPP Focus) doing this automatically.  If you are a higher rate or additional rate taxpayer you receive the additional tax relief via your Self-Assessment Tax Return (or by applying directly to HMRC).

Many in the industry have predicted a move to a flat rate of tax relief being utilised instead (say at 30%), given the perceived cost of funding tax relief from the government’s coffers. In fact, there is no cost per se as you need to be paying the tax at higher levels to receive it back, although this seems to be forgotten about in the rhetoric.

This has also seemingly been forgotten in the consultation, which states:

“The cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government.

As more people become pension savers for the first time and as automatic enrolment contribution rates increase, the cost of income tax and National Insurance contributions relief will increase. The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources are focused where there is most need.”

Many in the industry have seen this as a sign that flat rate tax relief is coming, which of course may be the case, despite previous Treasury denials. What is clear, however, is that this change would require a complete overhaul of the various pension regimes and therefore is unlikely to be completed quickly and without pain and significant cost to the industry.

Conclusions

Those in MPAA able and willing to make additional contributions should look to take advantage of this year’s £10,000 limit before it is lost. Remember there is no Carry Forward available to those in MPAA so once it’s gone, it’s gone!

With the potential of a change to flat rate tax relief, there is also an attractiveness to make significant pension contributions now. However, the ability to make such contributions is affected by the potential minefield of the MPAA, tapering and the ability to Carry Forward.

We remain committed to supporting you with such decisions. Please contact your Boolers usual contact prior to making any contributions, to discuss if and how you are restricted.

This article is based on our interpretation of the Chancellor’s speech and consultation document – Reducing the money purchase annual allowance, which cannot be guaranteed and could be subject to change.