Reducing the money purchase annual allowance
Published 8 March 2017
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Who is likely to be affected
Individuals who have flexibly accessed money purchase pension savings in a registered pension scheme.
Pension scheme administrators of a UK registered pension scheme and scheme managers of a qualifying overseas pensions scheme (QROPS) or former QROPS.
General description of the measure
The money purchase annual allowance (MPAA) counters an individual using the flexibilities around accessing a money purchase pension arrangement as means to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax-free. It also restricts the extent to which individuals can gain a second round of tax relief by withdrawing savings and reinvesting them into their pension. The MPAA is currently £10,000 and applies to individuals who have flexibly accessed their money purchase pension savings.
Policy objective
The government believes that an MPAA of £4,000 would be fair and reasonable and should allow individuals who need to access their pension savings to rebuild them if they subsequently have opportunity to do so. The reduction in allowance from £10,000 to £4,000 will limit the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system.
Background to the measure
The pension flexibilities introduced in April 2015 gave individuals the ability to access their pension savings flexibly, although if they wished to make further contributions to a money purchase pension then tax relieved contributions would be restricted to the MPAA. At Autumn Statement 2016 the government announced a consultation on whether reducing the MPAA to £4,000 would minimise the re-cycling of pension savings; allow the continued successful roll-out of automatic enrolment and sought evidence where a reduced MPAA would impact disproportionally on particular groups. Following the consultation, which closed on 15 February 2017, the government has seen no grounds to change its view on reducing the MPAA. A government response to the consultation will be published on 20 March 2017.
The level of the MPAA was announced at Spring Budget 2017.
Detailed proposal
Operative date
The reduction in the MPAA will have effect on and after 6 April 2017.
Current law
The current pension tax rules were introduced on 6 April 2006 (known as A-day) and are contained in Part 4 of Finance Act (FA) 2004.
An individual’s ability to make tax-free contributions to a registered pension scheme is subject to an annual allowance, which is normally £40,000. If the individual exceeds their annual allowance the excess is subject to tax (an annual allowance charge) at the individual’s marginal rate. Normally, an individual can carry forward unused annual allowance to set against saving contributions in a subsequent year (section 227 to 238A of FA 2004).
However, where an individual first flexibly accesses their money purchase pension savings (section 227G of FA 2004) they will be subject to a modified annual allowance test in respect of their money purchase pension savings, the (MPAA). As a result, all subsequent savings to a money purchase pension scheme will be subject to the MPAA limit (currently £10,000) and the excess charged at the individual’s marginal rate. Unlike the annual allowance, any unused MPAA cannot be carried forward for later tax years.
Where an individual is subject to the MPAA and they also make other pension savings within the same tax year, essentially savings to a defined benefit pension scheme, those savings are taken into account when calculating the taxable amount, but they are not tested against the MPAA (section 227B of FA 2004).
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to reduce the level of MPAA from £10,000 to £4,000 from 6 April 2017 for the 2017 to 2018 financial year and following years.
There are no changes being made in how the MPAA will operate.
As before any unused MPAA cannot be carried forward for later years.
There are no changes being made to the formulae used in calculating the MPAA and the transitional provision relating to tax year 2015 to 2016 and the tapered annual allowance will remain unchanged.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|
| +65 | +70 | +70 | +70 | +70 |
These figures are set out in table 2.2 of Spring Budget 2017 as ‘Money Purchase Annual Allowance: reduce to £4,000 per annum’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The money purchase annual allowance is applied to individuals who have accessed their pension savings flexibly. The reduction in this allowance from £10,000 to £4,000 reduces the risk of individuals acting against the spirit of the tax system and allows people who need to access their pension savings to rebuild them if they subsequently have to.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The money purchase annual allowance does not normally affect anyone below the age 55 and only applies to those individuals who have flexibly accessed their pension savings.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses. Pension scheme administrators and employers will incur one-off costs of familiarisation with the new rules, providing information and guidance to individuals and updating their systems to reflect the reduction in the money purchase annual allowance. There are not expected to be any on-going costs as pension scheme administrators and employers will have the MPAA process embedded within their current systems. There is no impact on civil society organisations.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
HMRC will incur additional costs in implementing this change. Initially, these will involve tactical adjustments to the Pension Annual Allowance stand-alone calculator, which are currently estimated in the region of £60,000. Further strategic changes to IT systems are likely to follow and will be detailed elsewhere.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through the monitoring of information collected from tax returns and existing tax records.
Further advice
If you have any questions about this change, please contact Steve Darling on Telephone: 03000 512336 or email: pensions.policy@hmrc.gsi.gov.uk.