Reduction in the MPAA: a sign of things to come?

Sitting here amidst a post-Christmas lull, whilst tucking into a seventh meal comprised of turkey, my mind naturally drifts to the Autumn Statement consultation about reducing the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000 with effect from 6 April 2017.

By HM Treasury’s standards, the consultation paper is relatively short; just 20 pages in length, of which only nine contain text of any substance.

And there are only two questions posed, on which “...the government is seeking stakeholder views”; in a nutshell, is £4,000 the right figure to reduce the MPAA down to, and will this disproportionately affect particular groups of savers?

And yet the consultation period runs until mid-February 2017.

Given that the paper states that, “Government will confirm the re-set level...in Budget 2017”, in what will be a year of two Budgets, this must mean the Spring one, which is usually held in mid-March.

The cynic within me doubts that all the consideration of responses and formulating of policy will take place in the intervening four weeks, which leads me to think this is already a done deal; the MPAA will be going down to £4,000 from the start of the new tax year.

In what has been a year of the biggest anti-climax in pensions; namely, no change to pensions tax relief, (despite all Osborne’s ‘sabre-rattling’ from the Summer Budget 2015 onwards), the MPAA consultation paper instead represents for me the clearest warning yet that change will come during the next couple of years.

In Chapter 3, under a sub-heading knowingly entitled, “Focussing tax relief where it is most needed”, we are told that, “the cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government. In 2014 to 2015 this cost around £48 billion, with around two thirds of the tax relief going to higher and additional rate taxpayers.”

£48 billion is a lot of money to waive; particularly given the current size of the fiscal deficit.

The focus then turns to the undoubted success of automatic enrolment, and in particular, the forthcoming statutory increases in minimum contribution rates to 5% in 2018, and 8% in 2019 (of which 1% will constitute employee contributions tax relief).

With the millions of people auto-enrolled into workplace pensions, of whom a significant proportion will represent the latest government acronym “JAMs”, (the “just about managing”), it is highly conceivable that May and Hammond will need to skew the continuing provision of tax relief away from higher and additional rate taxpayers, to those paying basic rate, or potentially no income tax at all; a redistributive move that will seek to cap tax relief as low as possible, but wrapped in a ‘cloak of fairness’ by Treasury spin-doctors.

The rationale behind the reduction in the MPAA is to stop those pesky over-55s from actively recycling their flexibly-accessed pensions into new contributions, and enjoying double tax relief in the process. How dare they!

To propose such a reduction, with all of its (un)intended consequences for savers, providers and Advisers alike, there surely must be evidence of significant tax abuse going on in the new pension freedoms landscape?

And yet the statistics set out in the consultation paper hardly serve to demonstrate this. We are told that, “only 3% of individuals aged 55+ make [money purchase] contributions of more than £4,000 a year”, and that the current MPAA of £10,000 is more than three and five times the average [money purchase] contributions made by men and women respectively, within the same age group.

I can only conclude that the proposed reduction is a ‘sledgehammer to crack a (Christmas) walnut’ , and an early warning sign of an end to higher and additional rate pensions tax relief, as the monetary impact of automatic enrolment reaches its full effect.

Happy New Year!