Pensions freedoms - Too good to be true?
The government is set to move ahead with its plan to slash the money purchase annual allowance by 60 per cent to £4,000.00 a year, after Chancellor Philip Hammond included savings from this measure in his budget papers.
The decision, which was brought in to prevent "pension recycling", drew immediate criticism from many pension scheme providers on the grounds that it would harm vulnerable people, and was against the spirit of pension freedoms.
Pension freedoms which were introduced by the previous Chancellor George Osborne became effective in April 2015 and they have provided flexibility for people in terms of how and when they access their retirement savings. They have proven to be extremely popular as people start to take a more individualistic approach to their retirement income needs.
The decision to change the MPAA (money purchase annual allowance) will affect over-55s who access the taxable part of their defined contribution pension. Currently, this group is allowed to contribute up to £10,000.00 a year into a Defined Contribution pension, as opposed to £40,000.00 for those who have not yet accessed their pension. The government confirmed at the spring budget it would slash this from £10,000.00 a year to £4,000.00.
Scottish Widows the pension scheme provider stated the move would "penalise those who need to make use of pension freedoms". They added "We estimate that tens of thousands of people will be affected by this change, and especially vulnerable customers who do not have access to professional financial support".
There is now a big educational job for providers, advisers and public services to ensure people understand the new rules.
It would seem to me that the approach is inconsistent with the government’s policy of encouraging fuller working lives and will result in many more people inadvertently breaking this limit and having to curtail post age 55 pension contributions, possibly even including having to turn down valuable employer contributions under auto-enrolment.
If you would like to discuss how this may affect you – please contact Adam at Argents Wealth Management on 0603 666132.