Gareth James: MPAA – the two decade pension contribution diet

In light of the growing emphasis on personal responsibility in pension saving, Gareth James asks if the money purchase annual allowance is actually a disproportionate policy the government needs to revisit

The need for personal responsibility has been a theme running through government policy relating to individual finances, and in particular, pensions, since George Osborne became Chancellor in 2010.

Dwindling membership of private sector defined benefit pensions mean the days of employers holding a paternalistic role in pension provision are no more.

The responsibility to provide for an adequate income in retirement now sits at the door of the individual. While auto-enrolment has reinforced the fact that employers have at least some responsibility to help individuals fund their retirement, the low level of minimum contributions means its rollout hasn’t really slowed this change.

Incremental growth in personal responsibility for the accumulation of pension savings has been more than matched by the acute change at decumulation stage with the pension freedoms.

Annuity sales have plummeted and recent HM Revenue & Customs and Financial Conduct Authority (FCA) statistics indicate that well in excess of a million individuals have taken a flexible payment from at least one of their pensions since April 2015.

I suspect a minority of those 1+ million individuals will have appreciated – in spite of the requirement for providers to notify them – that taking the flexible payment means the amount they can save into a money purchase pension has dropped by 90% from £40,000 to £4,000 per annum.

The money purchase annual allowance (MPAA), initially introduced at £10,000 per annum before being reduced to £4,000 with effect from the start of the 2017/18 tax year, is intended to prevent the use of significant salary sacrifice employer contributions after someone has flexibly accessed their pension as a means of tax manipulation.

Many consider the MPAA disproportionate, not least because manipulation was possible before the introduction of the pension freedoms, no evidence was provided either at the point the MPAA was introduced or the point it was reduced that tax rules had historically been manipulated and the government has been unable to confirm the amount of tax that has been raised, or more to the point saved, through the measure.

This lack of evidence becomes important when you bring in the growing emphasis on personal responsibility for pension saving and particularly when you consider the growing numbers who need or choose to work after reaching state pension age.

Recent figures from the Office for National Statistics show record numbers of over 65s remaining in the workplace. For the first time ever, more than 1.25 million over 65s are now part of the workforce.

Given the FCA has found a significant proportion of those accessing the pension freedoms and hence becoming subject to the MPAA, are doing so shortly after they reach age 55 this must be a cause for concern.

We have a significant number of individuals with up to 20 years of working life ahead of them, facing a severe restriction in the amount they and their employer can contribute to their pensions as a direct result of having potentially significantly reduced the value of those pensions by taking benefits.

The concern of short-term recycling of pension contributions hints at a potential solution. Rather than the MPAA affecting individuals for up to 20 years, perhaps it would be more proportionate for it to expire, say, five years after the last pension freedom payment had been taken.

The toxic mix of a severely restricted ability to save into a pension, potentially lasting a couple of decades, feels like an issue the government must revisit.

Gareth James is head of technical resources at AJ Bell