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MPAA change to £4,000 effective from April 2017

13 July 2017

Government ministers have confirmed that the Finance Bill will be introduced as soon as possible after the summer recess. This will legislate for all policies that were included in the pre-election Finance Bill.

The government has also re-confirmed that all policies originally announced to start from April 2017 will be effective from that date.

This means savers who have accessed their pension from age 55 will see their annual tax-free allowance cut from £10,000 to £4,000 for the 2017/18 tax year under the Money Purchase Annual Allowance (MPAA), which  was introduced following the pension freedoms in April 2015, and restricts the amount a person can contribute to a defined contribution pension if they have accessed their pension savings flexibly.

Announced by Treasury and HMRC on the Gov.uk website, at the end of statement confirming the timetable for  making tax records digital, the statement said implementing the measures in the Finance Bill would raise over £16 billion across the next five years to fund “vital public services”.

Commenting on the announcement, Tom Selby, senior analyst at AJ Bell, said the news would come as a “bitter blow” to thousands of retirees who have used the pension freedoms to access some of their retirement pot from age 55. “Many had hoped the general election would put a legal spanner in the works and force policymakers to, at the very least, delay reducing the MPAA until April 2018. These hopes have now been dashed by the Government.

“We do at least have clarity on what the MPAA is for 2017/18, which means advisers and individuals can plan with a degree of certainty.

“But the reality is the UK pension tax regime is a mess, bedevilled by complexity and confusing even to seasoned industry experts. Rather than continuing to tinker with a broken system, the Government should carry out a root and branch review aimed at simplifying the rules and encouraging more people to save for retirement.”

Retirement Advantage pensions technical director Andrew Tully said that research among people who have used the pension freedoms suggests 37% who have accessed cash from their pensions have continued to pay into a pension, while 19% say their employer has. “Worryingly, 67% of these people are completely unaware of the MPAA.”

He added: ‘There was always a risk government would legislate retrospectively and reduce the limit to £4,000 in this tax year. Our research shows a significant number of people are taking full advantage of the flexibilities while continuing to contribute to a pension. Unfortunately, awareness levels of the MPAA among the general public is low, so it’s inevitable people are going to be caught out by this change and face a hefty tax charge if they’ve paid in over the allowance.

“One of the key benefits of the pension freedoms was the ability to phase withdrawals to fit in with the increasingly flexible approach many people have to later life – taking sums to top up other income, or as a bridging pension until state benefits kick-in. Now the freedom to withdraw funds from 55 needs to be accompanied by flashing warning lights, although as many will cash-in without advice they may not be noticed until people are well past the stop sign.”

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