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‘Bitter blow’ to retirees as retrospective pension change enforced

Written by: Paloma Kubiak
An unpopular pension change, which failed to be enforced earlier due to the General Election, has now been applied - and backdated to April.

The government has confirmed that all policies originally announced to start from April 2017 will be effective from that date.

This deals a bitter blow to thousands of retirees who have taken advantage of a higher Money Purchase Annual Allowance (MPAA).

Those aged 55+ have a restricted annual allowance known as the (MPAA). In the Autumn Statement last year, the Chancellor announced the MPAA would be cut from £10,000 a year to £4,000 from 6 April 2017, affecting around 3% of over 55s.

It aimed to prevent the “inappropriate double tax-relief” advantage of people withdrawing money from their pension pot and recycling it back in again, gaining tax-relief a second time.

The MPAA cut was due to come into effect this tax year, but as it didn’t receive royal assent due to the General Election, many people assumed the higher £10,000 limit would still apply.

Last month warned that retirees should plan as if the Finance Bill changes were going ahead.

Tom Selby, senior analyst at AJ Bell, said: “Today’s news will come as a bitter blow to thousands of retirees who have used the pension freedoms to access some of their retirement pot from age 55. Many had hoped the General Election would put a legal spanner in the works and force policymakers to, at the very least, delay reducing the MPAA until April 2018. These hopes have now been dashed by the government.”

What to do if you’re impacted by the pension allowance cut

Richard Parkin, head of pensions policy at Fidelity International, gives the following tips:

1) If you’ve not taken money from your pension but are thinking of doing so, consider whether you really need the money and if you need to take it from your pension. If your total pension contributions, including those of your employer, are more than £4,000 per annum taking anything more than the tax-free cash from your pension will limit how much you can save tax-efficiently in the future.

2) You should consider reducing your personal contributions unless doing so would reduce the contributions your employer pays (these are called “matched contributions”). Making unmatched contributions in excess of the allowance means you could effectively end up paying tax twice on this money so it’s simply not worth it. But don’t just spend it. Consider diverting it to an ISA where it will grow tax-free.

3) If having reduced your unmatched contributions to zero your total contributions are still over the £4,000 allowance then you need to see what options your employer offers in relation to changing the remaining contributions. This can be complicated but the main options they might offer are as follows:

  • Pay all or part of their contributions as additional salary. This may mean they won’t match your voluntary contributions and you could get a lot less than you expect as your employer will have to pay National Insurance and you will have to pay National insurance and income tax.
  • Continue to match contributions you make but only into the pension scheme. If this is the only way of keeping the employer contribution it will often be worth maintaining your contributions as the benefit of the employer contribution will generally more than offset the extra tax you’ll pay.
  • Continue to match contributions but pay them into another savings vehicle such as an ISA. This may be a better option than having the contributions in a pension as you won’t pay tax when you withdraw the money, but it will depend, amongst other things, on what deductions are made from the contributions for National Insurance and tax.

4) If you are likely to go over the allowance and incur a tax charge then you should ask your pension scheme provider if the tax charge can be paid direct from your pension. This is more tax efficient and may be easier to manage than paying the tax bill direct from your income (unless you exceed your allowance in more than one scheme). But pension schemes are not always obliged to offer this facility.

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