Flaws in the Government’s strategy to tighten pension rules
The Low Incomes Tax Reform Group (LITRG) has warned of the consequences of the planned reduction from this April in the pension money purchase annual allowance (MPAA) from £10,000 to £4,000 a year, especially for those with limited money.
The pension flexibilities introduced in April 2015 gave savers the ability to access defined contribution pensions as best suits their needs. MPAA restricts tax-relieved contributions to a pension when someone has already accessed their pension savings and wishes to make further payments. The MPAA reduction is designed to limit the extent to which individuals who have already accessed pension savings can recycle this cash back into pensions and thereby benefit from tax relief for a second time.
Given that it is too soon to predict what impact pension freedoms and the Lifetime ISA will have on savings patterns, the Treasury consultation document’s view1 that a MPAA of £4,000 will affect fewer than three per cent of savers may not be accurate in the future. Therefore, LITRG warns that the £4,000 limit must be reviewed at least every three years.
In its response to the Treasury’s proposals, LITRG made a wider point that the Government risks promoting a disjointed savings policy to the public because of the reduction of MPAA. For example, someone who takes advantage of the new Lifetime ISA from April 2017 but then later moves that money into a pension from age 602 could benefit from the ‘double tax relief’ that reducing the MPAA is supposed to prevent.
LITRG recommends that where the allowance is exceeded there should be an option to pay the tax due from the fund. This will prevent those that do mistakenly exceed the MPAA from being caused financial hardship.3 The group also warned that people might not understand the MPAA and how to comply with it because of inadequate guidance.
Robin Williamson, LITRG’s Technical Director, said:
“Maintaining a reduced money purchase annual allowance is preferable to an absolute prohibition on any reinvestment into a pension. But reducing it to £4,000 from April 2017, which equates to savings of £333 a month, is very likely to catch out people of limited means who, for example, may have taken a pension lump sum to repay their mortgage or debts, then reinvested their new-found disposable income towards their retirement.
“Clear warnings as to the limit on further pension savings must be given in official and pension company guidance, and the potential tax charge if the MPAA is exceeded.
“Some of the guidance on the MPAA currently provided on various government websites is disjointed, inadequate and potentially misleading. We urge that this is reviewed as a priority, before the reduction in MPAA from April 2017; and that it is kept under review as the programme of change for public financial guidance develops.”
Note to editors
1. The consultation document can be found here.
2. Age of 60 otherwise Lifetime ISA funds have to be applied to a house purchase.
3. Currently the type of payback suggested by LITRG is only permitted where the standard annual allowance applies and the tax charge is at least £2,000.
4. LITRG’s recent submission to the Treasury can be viewed here.
5. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)