It’s all in the detail
The government has clarified its position on a number of outstanding issues for pension savers – but not everyone will be pleased.
The recent Queen’s Speech contained little on pensions, yet the government has since been obliged to make a number of announcements on pensions policy.
Firstly, it has moved to clear up the confusion over the amount individuals who have dipped into their pension pots can continue to save into their plans.
The Money Purchase Annual Allowance (MPAA) is the most you can save into a defined contribution pension tax-free once you have accessed cash or taken a flexible income from it under pension freedoms rules.
The government has now confirmed its intention to reduce the MPAA from £10,000 to £4,000 – but perhaps more controversially, it is intended that the cut will be backdated to April 2017.
The reduction, announced during Autumn Statement 2016 and detailed in the first version of the Finance Bill, was due to come into effect this tax year, but it didn’t receive Royal Assent due to the timing of the general election. Savers could have been forgiven for thinking that the £10,000 limit still applied, and perhaps that the reduction would be postponed until April 2018.
However, the Treasury has now confirmed that the withdrawn provision will be among several included in a new Finance Bill to be introduced after the summer recess, and that the 60% MPAA cut will be applied retrospectively.
The move has attracted widespread criticism from experts, including former pensions minister Steve Webb.
“Cutting the MPAA is an unnecessary measure in the first place, but it is particularly unacceptable to do so with retrospective effect. How were savers meant to know in May who was going to win the election?” he commented.
Ian Price, divisional director at St. James’s Place, says that the measure, if approved by Parliament, could create a significant problem for those who have accessed their pension before fully retiring.
“Some people may have accessed cash from their pension to clear mortgage debts or support their children, but with the understanding that they could still make £10,000 of tax-relievable contributions each year. The announcement is very unfair on them.”
Price urges everyone to take advice before taking benefits from a pension “so that they understand what will be the impact on their ability to fund future contributions”.
Relief of sorts
On a more positive note for savers, Secretary of State for Work and Pensions, David Gauke has reiterated the government’s view that now is not the time to make fundamental changes to the system of tax relief on private pension contributions.
There had been speculation that the current system of upfront tax relief based on income could be replaced by a flat rate of tax relief, or with an ISA-based model where there is no tax incentive on contributions but withdrawals are free of income and capital gains tax.
The delay in any big announcement will be welcomed by many higher and additional rate taxpayers, who can continue to benefit from tax relief at 40% and 45% respectively, on the assumption that anything over the basic rate is reclaimed via the individual's tax return.
“There hasn’t been a consensus view on what a new system looks like, so it’s unlikely we will see any fundamental changes in the near future,” says Price. However, he warns that the chancellor could pull other levers if he is serious about reducing the cost to government of pension tax relief, which amounted to £38 billion in 2015/16.1
“For example, a further cut to the annual allowance would reduce the amount that top earners can save into a pension each year – this would effectively restrict the availability of tax relief,” he says.
Price stresses that, while there is no immediate threat to higher rates of tax relief or the annual allowance, retirement savers would be wise to take advantage of current rules and reliefs.
In a further measure, the government has confirmed its intention to raise the State Pension age to 68 earlier than the legislated date – and in line with the recommendations of a review by former CBI boss John Cridland.
The State Pension age for men and women will rise through a series of gradual increases to 66 between 2018 and 2020 and to 67 between 2026 and 20282. It was due to start rising to 68 in 2044, but under new proposals this will be phased in seven years earlier from 20373.
Around seven million people are affected by this latest proposal, which includes many of those currently in their 40s. They will have to work for an extra year before they can claim their State Pension4.
In a statement to Parliament Mr Gauke said: “This is about the government taking responsible action in response to growing demographic and fiscal pressures.”
Shadow Work and Pensions Secretary Debbie Abrahams called the announcement “an astonishing continuation of austerity”.
In order to secure its deal with the Democratic Unionist Party (DUP) for a working majority, the government has dropped planned changes to the triple lock – the system which guarantees that the State Pension rises in line with the higher of earnings, inflation or 2.5%.
Before the election, the Tories pledged to replace the triple lock with a ‘double lock’ from 2020, ensuring rises in line with the higher of earnings or inflation, but not by a minimum of 2.5% per year.
After the DUP–Tory deal, Downing Street announced that the triple lock would be retained beyond 2020 – a move that is likely to be welcomed by many of the country’s 12 million pensioners5, but the cost of which will be shouldered by the UK taxpayer.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 Personal Pensions Statistics, HM Revenue and Customs, February 2017
2 www.nidirect.gov.uk, accessed 26 July 2017
3 Proposed new timetable for State Pension age increases, www.gov.uk, 19 July 2017
4 Population Estimates for UK, Office for National Statistics, June 2017
5 Projected number of people in the UK of state pension age (SPA) or older, www.pensionspolicyinstitute.org.uk, accessed 26 July 2017