Pension flexibilities introduced in April 2015 gave savers the ability to access their pension pots as best suits their needs. However at the same time the concept of an MPAA (Money Purchase Annual Allowance) was introduced. The means that once a person has accessed their pensions flexibly there is a limit on the tax-relieved contributions which can be made to a Defined Contribution (DC), often still referred to as money purchase, pension plan. This is to prevent pension “recycling” i.e. regaining a second round of tax relief by withdrawing savings from a pension, and reinvesting them either directly or by diverting their salary, back in to a pension and then immediately withdrawing 25% tax free. This is considered to be an abuse of the system.
When originally introduced in April 2015 the MPAA was set at £10,000. The government felt that there was a balance to be struck as it was envisaged that some individuals may need to draw on their pension and access pension flexibility but then their circumstances might change and they might legitimately want to rebuild their pension savings. However the government now feels that the original limit on the MPAA of £10k should be reduced. At a level of £10,000 pension recycling can still provide a tax benefit of £1,125 for an additional rate taxpayer.
It has been possible to draw DC pension savings as a lump sum since 2011, however until the reforms in 2015 there were tight controls on this and anyone using this facility was unable to make any further contributions to a DC pension. It would be possible to return to a ban on DC contributions, which would safeguard against any exploitation and be simpler. However the Government still feels that there may be genuine cases where people may want or need to re-build their pensions. It is also mindful of auto-enrolment for workplace pensions. It is therefore proposing that the MPAA be reduced to £4,000 with effect from April 2017. This would ensure that where a person remained in, or returned to, employment having drawn benefits flexibly, pension savings could be made at a level that is above those required under automatic enrolment. The maximum legally-required savings under auto-enrolment are currently £743, rising to £2,974 from 2019[i]
Pension recycling – questions unanswered
This subject to consultation and the government is seeking stakeholder views on two questions :
- Question 1: Do you agree that a £4,000 MPAA would minimise re-cycling pension savings and that, coupled with ongoing monitoring, the new MPAA will allow the continued successful rollout of automatic enrolment?
- Question 2: Is there any evidence that setting the MPAA at £4,000 would impact disproportionately on particular groups?
The closing date for responses is 15 February 2017. Changes will be enacted from April 2017.
If you have any queries in relation to the MPAA and how the changes may affect you or your clients, or in relation to the taxation of pensions more widely please contact Sharon Collier at Enterprise Tax. Telephone : 01565 759820 Email : firstname.lastname@example.org
[i] The 2019 maximum is based on the ceiling of earnings required to be pensioned in 2016. This is aligned with the higher-rate tax threshold in 2016. No uprating through to 2019 has been assumed, as this figure is set annually. The Conservative party manifesto included a commitment to raise this to £50,000 and, even at that level, required contributions under automatic enrolment would be less than £4,000.