Money Purchase Annual Allowance cut/”pension freedom”
The Budget confirmed that the Money Purchase Annual Allowance (MPAA) will be cut to £4,000 from the current level of £10,000, as originally trailed in the Autumn Statement. The MPAA restricts the level of pension contributions that can be made by over-55s who have accessed pensions flexibly in particular ways under “pensions freedom”.
“Pension freedom allows over-55s to access pension savings how and when they wish. That creates a risk that some might divert part of their salary into a pension and take it straight out again – so they get a tax and NICs saving without doing any actual retirement saving.
“The Government opened this loophole itself and has not produced any evidence that it is being exploited, but it understandably wants to limit the damage. Cutting the MPAA from £10,000 to £4,000 limits the maximum annual revenue loss per person from about £2,500 to about £1,000. If over-55s started exploiting this on a serious scale, a £4,000 MPAA would not be the end of the matter. But this might just be a short-term sticking plaster if the Treasury is planning to look again at root-and-branch changes to pensions taxation.
“The Government had already banked the revenue from this measure, so it was always a long-shot that it would change its mind following what looked like a token consultation. However, it is hard to see why ministers are so confident that a £4,000 MPAA will not hamper the successful rollout of automatic enrolment: under a pension scheme quality test used by many large employers, contributions are set to exceed £4,000 for people earning over £44,444 from April 2019.
“Today’s announcement confirms that ‘there are no changes being made in how the MPAA will operate’. This means that people with access to drawdown can still take 25% of their pot tax-free without triggering the MPAA, as long as they don’t take a taxable income from the rest. Meanwhile, smaller withdrawals that are 25% tax-free and 75% taxable can trigger the MPAA.
“The Government says that the revenue collected from letting over-55s dip into their pension pots – or empty them altogether – was nearly three times higher than expected in the first two years. FCA figures suggest that, in the space of just six months to September 2016, at least 79,000 people accessed pension pots in ways that would have triggered the MPAA. Almost half of the people who completely emptied a pension pot during this time were under 60 – though cashing out a pot under £10,000 won’t usually trigger the MPAA.”
National Insurance for the self-employed
The Budget announced that the main rate of Class 4 NICs will increase from 9% to 10% in April 2018 and 11% a year later. The Red Book says that this is partly to “reflect the introduction of the single-tier state pension to which the self-employed have the same access”.
Robbins said: “Previously, self-employed people paid a lower rate of NICs than employees but only accrued rights to the Basic State Pension and not the additional State Pension. From April 2016, they have continued to pay less NICs while building up exactly the same pension entitlements. There were always warnings that this would not be sustainable, and cynics might think that HM Treasury allowed the anomaly to emerge in order to clear it up. It had already played State Pension simplification well, using it as a pretext to cut the State Pension incomes that most younger workers can expect.
“Higher National Insurance for the self-employed will obviously hurt, and will make it more challenging for this year’s automatic enrolment review to persaude them to save in funded pensions as well. But it does not level the playing field with employees in terms of the NIC/State Pension deal. First, 11% is still below the 12% main rate of employee NICs.
Second, employees effectively pay employers’ National Insurance (13.8%) too, as this holds down the wages that they can attract.. Third, many self-employed people enjoyed a windfall gain because the National Insurance they paid prior to April 2016 will buy them more State Pension (at least ignoring changes to State Pension Age) than they were originally told it would do.
“The Government is being criticised because this policy appears to go against some statements about not increasing National Insurance that were made during the election. We can only hope that the desire to avoid similar row will put it off looking again at pensions taxation in the Autumn Budget. The Conservatives said during the election campiagn that, once they had reduced allowances for high earners ‘we believe that the pensions tax relief system will be fair and afforable and we will not propose any further changes to the system during the next Parliament’.”
Long-term care review and pensions
The Budget promises a Green Paper on social care. Press reports have said that this might consider allowing tax-free withdrawals from pensions to pay for long-term care.
Robbins said: “Contributions to pensions come from pre-tax income, so this would mean that money earned, saved in a pension and ultimately used to pay for long-term care would not be subject to income tax at any point. Pension withdrawals spent on holidays would be taxed, whereas withdrawals spent on care fees would not.
“That amounts to a strongly preferential tax treatment, but not a uniquely privileged one. 25% of pension withdrawals are already tax-free, as is money withdrawn from bequeathed pension funds when the saver dies under the age of 75. The Government also announced recently that pension savers will be able to withdraw up to £500 tax-free on up to three occasions to pay for financial advice. Away from pensions, redundancy payments up to £30,000 incur no income tax at any point; nor does salary sacrificed into employee share schemes (unless the shares are sold within prescribed lock-in periods).
“If you want to get people to save for retirement, it may be easier to get them to think about what they dream of doing in the early years after work than to visualise themselves at the end of their lives. Long-term care is a depressing thing to save for – so there is a case for strong incentives but also some doubt about whether they would have the desired effect.”
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