Pension triple lock safe for now but those in drawdown to take a hit
Chancellor Philip Hammond today outlined some key pension changes in his Autumn Statement. Here’s a summary of what’s been announced:
Pension triple lock
After the Work and Pensions Committee called for the ‘unfair and unsustainable’ triple lock to be scrapped, many feared Hammond may take the opportunity in his first Autumn Statement to make such a move.
But today, telling the house that pensioner poverty is at its “lowest ever level”, he said the government will meet its pledge to pensioners through the triple lock.
Introduced in 2010, the pension triple lock is a guarantee to pay the higher of inflation, earnings growth or 2.5% via the state pension.
However, the guarantee appears to only be in place for the current parliament as the Chancellor said: “As we look ahead to the next parliament, we will need to ensure we tackle the challenges of rising longevity and fiscal sustainability.”
Steven Cameron, pension director at Aegon, said: “The state pension is the bedrock of many people’s retirement incomes and nine years of ‘triple lock catch up’ by 2020 will be a very valuable boost to pensioners,
“But clearly, the more its value, the greater its cost to the government and taxpayers. Considerations around state pension increases should be reviewed every five years on affordability grounds, and to make sure the government is allocating finite resources fairly between generations.
“However, the Chancellor’s mention of growing longevity and the need to assess pensioner support for this growing elderly population did not go unnoticed. We await further details on ‘budget balancing’ plans to further increase state pension age, but we also need to give people flexibility to access their state pension earlier at a reduced level.”
Money purchase annual allowance
The annual allowance is the total amount of money you can pay into your pension pot each year, including contributions from your employer into a defined benefit or defined contribution scheme, tax-free. It’s currently at £40,000.
But for those aged 55 taking advantage of pension freedoms by releasing or drawing down some or all of their tax-free cash sum and who have benefitted from an income from the remaining drawdown pot, they have a restricted annual allowance. This is known as the Money Purchase Annual Allowance (MPAA).
This is currently set at £10,000 per year but Hammond announced that from April 2017, the MPAA will be reduced to £4,000, affecting 3% of those in drawdown.
In his speech, he said: “The government does not consider that earners aged 55 and over should be able to enjoy double pension tax relief, such as relief on recycled pension savings, but does wish to offer scope for those who have needed to access their savings to subsequently rebuild them. For pensions that have been drawndown, I will also reduce to £4,000 the Money Purchase Annual Allowance, to prevent inappropriate double tax relief.”
Martin Tilley, director of technical services at Dentons Pension Management, said: “This is likely to impact individuals who partly retire, perhaps dropping to three or four days a week but whose employer will be still be paying a pension contribution based on their continuing earnings. Depending upon how many days are still worked, the individual’s salary and pension contribution rate, a tax charge could be incurred by the individual on his company’s contributions.”
The Chancellor was expected to announce a crackdown on fraudsters who trick people out of their pension savings in his Autumn Statement and he didn’t disappoint.
Hammond said: “The government will shortly publish a consultation on options to tackle pension scams, including banning cold calling in relation to pensions, giving firms greater powers to block suspicious transfers and making it harder for scammers to abuse ‘small self-administered schemes’.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the announcement is a welcome fight-back against the criminals who try to steal investors’ retirement savings.
He said banning cold-calling won’t eradicate the problem but it will help in two important ways.
“It will create a punishable offence at the outset before they have even got their hands on investors’ money. Hopefully this will deter some would-be fraudsters; it will also send a clear unambiguous message; if someone cold calls you about your pension then they are up to no good.”