Commenting on the decision to reduce the Money Purchase Annual Allowance to £4,000 from £10,000, Chris Noon, Partner at Hymans Robertson said: “The reduction of the MPAA makes no sense in a modern world and remains totally contradictory to the philosophy of pension freedoms. The government will save £70m p.a, but at great expense to those wanting to work part time to supplement their retirement income. It is clear that this move by the Government is trying to stamp out recycling pension savings – whereby people could get a double hit to pension tax relief by withdrawing money from their pension and then re-investing it. It could be a hindrance to working flexibly at time when more should be done to support the increasing pension savings shortfalls.
“Retirement is no longer seen as a cliff-edge event. It is a process that takes place over many years. The government should be doing more to help people finance a change in working patterns, as more and more people are beginning to retire with DC pensions rather than DB and are unable to retire early. For some, working full time into later years will be a challenge – either for health reasons or because they have care responsibilities – and the ability to stagger retirement will be a necessity.
Giving an example of how someone could be affected by this new rule, Chris Noon added:
“Let’s take the example of a 57 year old earning £50,000 per annum full time and they’ve already taken advantage of the 25% tax free lump sum. They decide to reduce their hours to a 3 day week bringing their earnings down to £30,000 and they decide to withdraw money from their pension to supplement their income. If we assume they have total contributions of 15% into their pension (a combination of theirs and their employer’s contribution) that equates to £4,500. What this means is people will either be deterred from withdrawing from their pension or they’ll stop saving into it.”
Kate Smith, Head of Pensions at Aegon said: “We’re disappointed the Chancellor is continuing with his proposals to cut the MPAA for those who have exercised pension freedoms from £10k to £4k. Only two years on we’re already seeing the pension freedoms unravelled, based on no evidence that people are deliberately trying to abuse the pension tax system.
“We expect few people will be aware of the risks they’re running by continuing to make pension contributions, once they’ve begun accessing their savings. The approach is inconsistent with the Government’s policy of encouraging fuller working lives and will result in many more people inadvertently breaking this limit and having to curtail post age 55 pension contributions, possibly including having to turn down valuable employer contributions under auto-enrolment.”
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