HMRC should allow refunds of pension contributions that exceed the annual allowance

Ambiguity around the level of the Money Purchase Annual Allowance (MPAA) means HMRC should make the rules regarding refunding pension contributions more flexible, according to AJ Bell.

Currently, the rules don’t allow pension contributions to be refunded just because the annual allowance has been exceeded.  Savers instead face an annual allowance charge at the rate at which they received tax relief on the contribution that exceeded the annual allowance. 

They would also have to pay income tax on the funds left in the pension when they withdraw them, even though the tax charge means they’ve effectively not received tax relief on them. 

A refund of the contribution would ensure investors are not left out of pocket due to the lack of clarity surrounding the MPAA and give them the funds to invest in another product or into their pension in another tax year.

Gareth James, head of technical resources at AJ Bell, comments:

“The information vacuum surrounding the MPAA is creating a real headache for investors that have utilised the pension freedoms.  If they pay in £10,000 and the MPAA is reduced to £4,000 with effect from 6 April 2017, they’ll face an annual allowance charge.

“People can choose to only contribute £4,000 until the legislation is re-introduced, but what happens if the MPAA is only reduced with effect from the date the fresh legislation is enacted? They would then potentially have lost the opportunity to pay an extra £6,000 – or 150% of their new annual contribution limit – into their pension.

“An option HMRC should consider is to permit contribution refunds where any of the annual allowances are exceeded. At least half a million savers are already affected by the MPAA and they deserve absolute clarity on when any change will take effect and the option to put things right if the lack of clarity causes them to pay in too much.”

Background

The current lack of clarity around the MPAA means hundreds of thousands of people could exceed the MPAA and be subjected to an annual allowance charge.

Anyone who has flexibly accessed their pension under the pension freedoms, estimated to be at least 500,000 people*, now has their pension contributions restricted by the MPAA.

Prior to the 2017 Budget, the MPAA level was clear. Savers affected by the reduced allowance knew, provided they read the notification from their pension provider or were alerted by their financial adviser, that the amount they could pay into money purchase pensions had dropped from £40,000 to £10,000. They also knew that they’d lost the ability to use carry forward under defined contribution pensions.

The Budget and subsequent announcement of the General Election ended that certainty

The Budget statement made it clear that the allowance would drop from £10,000 to £4,000 on 6 April 2017. What wasn’t clarified (with providers under no obligation to write to customers already subject to the MPAA about the change) was how those circa half a million people would be told that their allowance had reduced.

The position became even murkier when, shortly after the announcement of the General Election, the Government amended the Finance Bill by removing the provisions intended to reduce the MPAA.

This leaves a position where the MPAA is £10,000; there is no legislation in the pipeline to reduce the allowance; but policy makers in Government have confirmed that their plans haven’t changed and the relevant legislation will be re-introduced as soon as possible after the General Election.

 

*Between April 2016 and March 2017, HMRC’s own statistics show that 393,000 individuals received a flexible payment from their pension. The previous year’s figures, based on data submissions from only some pension providers, showed that 232,000 individuals took a flexible payment. Given the number of individuals who’ll have received a payment in only one of those tax years, an estimate of at least 500,000 isn’t difficult to achieve.