AJ Bell has also written to Richard Harrington, the Pensions Minister urging the Government to delay the reduction of the MPAA from April and consider more wide ranging reform which would work better for both savers and the Treasury. Its key recommendations to the consultation are:
Scrap pensions carry forward in relation to money purchase contributions for anyone who has accessed their pension
Use the tax savings from this to set a ‘universal MPAA’ at a level that is sustainable and fair
Trigger the ‘universal MPAA’ when a pension is accessed in any way (including tax-free cash and annuity purchase)
This would remove the anomaly whereby an individual taking a tax-free lump sum can continue to save £40,000 per year and use carry forward rules to pay in up to £160,000 in one go, but that anyone who receives a taxable income (ie drawdown or uncrystallised funds pension lump sum) sees their annual allowance drop by 90% to £4,000 under the current proposals.
It would also greatly improve consumer understanding of when the MPAA applies – currently most people are unlikely to have heard of the MPAA and are very likely to take a potentially irreversible action that has a significant impact on their future ability to save.
Tom Selby, senior analyst at AJ Bell, says:
“The proposed cut to the MPAA is expected to raise tens of millions of pounds. This is loose change in Government spending terms but the cut flies in the face of the pensions freedoms. People are being encouraged to use their savings flexibly and yet when they do so they are punished with a drop in their annual allowance from £40,000 to £4,000.
“Furthermore, the rules create an anomaly whereby someone who takes 25% of their pension fund tax-free can use carry forward to pay in up to £160,000, while someone who takes £1 of taxable income can only pay in £4,000.
“It is not just the super-rich who will be affected – large chunks of middle Britain, many of whom might need to catch up for years when they have failed to save, will also be caught.
“Rather than rushing through a tweak to the existing flawed MPAA system which risks further damaging trust in the pensions system, policymakers should hold off any change and work with the industry to build a framework that is simple and sustainable.”