Last week, the government threw the planned reduction in the money purchase annual allowance (MPAA) into confusion.
The reduction – from £10,000 to £4,000 – was originally announced last November in the autumn statement. The government is worried about people taking retirement benefits and then recycling money back into pensions to take advantage of tax reliefs (despite its admitted lack of research into the scale of any recycling problem). To stop – or at least contain this – there is a limit on how much an individual can contribute to a money purchase scheme if they have ‘flexibly accessed’ retirement benefits (generally, this means taken income from a flexi-access drawdown plan or an uncrystallised funds pension lump sum (UFPLS)). This limit is the MPAA.
The intended reduction in the MPAA created controversy. Many providers and advisers objected to it – pointing out that it sat at odds with the key government policy of encouraging people to merge continuing to work with taking some retirement income. Reducing the MPAA doesn’t allow those people to fully rebuild their pension income.
The retrospective nature of the change also angered many; the new limit of £4,000 would apply to everyone who had flexibly accessed benefits, whether that was in 2017/18 or at any time since April 2015. And once the MPAA is triggered that is that – the limit on money purchase contributions applies for ever more, even if the person never again draws retirement benefits.
However, the government decided to push ahead with the reduction, and included the legislation in the draft Finance (No. 2) Bill 2017.
Now, in an unexpected turn of events, the government has announced that it has cut several clauses from the draft finance (No. 2) bill. This is to make sure a slimmed-down bill could be pushed through parliament and receive royal assent before the election. And the clause reducing the MPAA was one of the ones cut.
However, this does not mean that the reduction in MPAA has been abandoned. The government has said there is no change to policy intention, and it will include the dropped clauses in a new finance bill once the general election has passed.
Enacting retrospective legislation is not unusual. After all, even if the legislation had been passed by July as originally planned it would have been retrospective. So, that aspect shouldn’t unduly worry advisers and clients – even if the time lag may be six months or more.
Importantly, the government’s policy intention to introduce the legislation at the first available opportunity seems clear cut. Of course, there could be changes to this direction. We are getting a new government – the colour of which is unknown – and it may have different intentions. However, I think it’s probably unlikely this policy change will be dropped entirely.
How to proceed?
Advisers may want to err on the side of caution and continue to work with clients on the basis the MPAA will reduce to £4,000 for this tax year. By the end of the summer we should know for definite the final position for this tax year. And if the proposed reduction to £4,000 is dropped, then advisers and clients still have enough time to pay higher contributions up to the £10,000 limit.
There is, of course, a bigger question lurking about what action – if any – a new government will take on tax reliefs for pensions, and the various manifestos, when published over the next few weeks, may help make this clearer.
The dropped legislation not only affects MPAA. The clauses outlining the increase in employer-arranged advice from £150 to £500, and the slash in the dividend-free allowance from £5,000 to £2,000 were also cut from the draft bill. However, the cut in the tax-free dividend allowance is not due to be implemented until next April, so this delay in final legislation may not have any real effect.
This episode shows how confusing retrospective legislation can be. People are making decisions today about how much to contribute to their pensions. And they are relying on advisers and providers to give them the right information and the right steer. Not knowing for certain a simple thing like what the limit is to get full tax relief is – to say the very least – undesirable.