23rd November 2016
Retirees who have accessed their pension pot, but want to boost their pension again will only be able to pay in an additional £4,000 a year down from £10,000 from next April, in a move announced in the autumn statement.
From next April, the Money Purchase Annual Allowance falls from £10,000 to £4,000. Although the move may only impact a small number of people because few in reality will reach this limit, pension experts warn it could have implications for those still receiving substantial employee benefits and who take part time work later in life and want to put money back into their pension.
Gareth James, head of technical resources at AJ Bell, said: “The proposed cut in the MPAA to £4,000 is likely to be relevant to a tiny number of savers and it is difficult to see how the Government is going to raise anywhere near the £70 million a year it anticipates.
“The consultation document points out that only 3% of individuals aged over 55 make pension contributions of more than £4,000 a year and our experience is that the number of people who have used the pension freedoms that make those kind of contributions is even lower. It will be interesting to see whether the Government proceeds with this proposal once it has heard representation from the industry about the limited impact it is likely to have.”
Others say that savers should think long and hard before considering accessing freedoms especially if they will still receive significant employer contributions.
Hargreaves Lansdown head of pension research Tom McPhail says: “This means anyone contemplating drawing on their retirement savings needs to be very clear about their future retirement saving plans. Taking even £1 in excess of your tax free lump sum, or using the uncrystallised funds pension lump sum rules in your 50s for example could leave savers with only very limited scope to make further pension saving in the future. In particular it could deny them the benefit of future employer contributions.
“It is vital therefore that savers plan the drawing down of any pension savings with great care, checking what the future saving implications will be before tapping into their savings. The restriction is also likely to be retrospective, so anyone already caught by the MPAA may have to adjust their pension saving plans in the future.”
Jon Greer, pensions expert at Old Mutual Wealth, says: “Since April 2015, it is estimated that 475,000 people have accessed their money purchase pensions savings flexibly, but soon under proposals announced by the Chancellor in his Autumn Statement they will be subject to a 60% reduction on how much they will be able to save into a defined contribution pension.
“The current annual allowance stands at £40,000 which reduces to £10,000 for money purchase arrangements, as soon as the pension is accessed flexibly. Today’s announcement sees that allowance set to be reduced further, to £4,000 (subject to consultation), from April 2017.
“Careful planning is needed for people who in the future may still want to make further pension contributions, but who are considering flexibly accessing their pension savings or who may be considering starting to take income from their existing flexi-access drawdown savings. If they provide income in the wrong way it could lead to a 90% reduction in their ability to save into a pension after April 2017.
“Philip Hammond is targeting the potential to recycle pension savings to reduce tax. However, increasingly 50-75 year olds are using temporary and flexible work as a way to fund their retirement. Our YouGov research* with UK adults aged 50-75 found that 30% expect a job to help fund their future retirement income needs. These people may need to access their pension flexibly, but may also look to fund back into the pension in periods when alternative income is higher, thereby sustaining their long term pension provision.”
Steven Cameron, pensions director at Aegon, says: “Reducing the cap on post freedom pension contributions to £4,000 makes it much more important to think ahead. Accessing any of your pension funds early, for example to generate a one-off cash sum while still working, to pay off a short term debt for example, could now seriously affect your future pension prospects. It could even stop you receiving the full amount your employer is prepared to contribute if this would take you above £4,000. This is a further reason to seek advice before accessing pension freedoms.”