Changes to the Money Purchase Annual Allowance (MPAA) could act as a disincentive to flexible working just at a time when we should be supporting it.

Key points from the Autumn Statement:

• The new Money Purchase Annual Allowance of £4,000 is too low given we need to change the way we need to think about ‘retirement’ and better support flexible working.

•  This goes against the philosophy of pension freedoms for a cost saving of just £70m.

The Chancellor’s announcement that the Money Purchase Annual Allowance will be reduced to £4,000 from £10,000 in April 2017 is a blow to flexible working. 

Commenting, Chris Noon, Head of Workplace Savings, said:

“The Government is clearly trying to stamp out recycling pension savings - whereby people could get a double hit of pensions tax relief by withdrawing money from their pension and then re-investing it. However this policy, which will save the Government £70m pa, could be a disincentive to flexible working at a time when we should be doing more to support it given increasing pension savings shortfalls. ‘Retirement’ is no longer a cliff-edge event. It’s a process over many years. 

“As we see a shift of more people retiring with DC than DB pensions we’ll see more people unable to retire early. But for some, working full time into later years will be a struggle – either for health reasons or because they have care responsibilities. The government should be doing all it can to support that.”

Giving an example of how someone could be affected by this new rule, Chris added:

“Let’s take the example of a 57 year old earning £50,000 per annum full time and they’ve already taken advantage of the 25% tax free lump sum. They decide to reduce their hours to a 3 day week bringing their earnings down to £30,000 and they decide to withdraw money from their pension to supplement their income. If we assume they have total contributions of 15% into their pension (a combination of theirs and their employer’s contribution) that equates to £4,500.  What this means is people will either be deterred from withdrawing from their pension or they’ll stop saving into it. This is antithetical to the philosophy of pension freedoms, as well as unsupportive of flexible working. The level is too low.”

Discussing the Government’s consultation on this, he concluded:

“It’s good to see that the Government is consulting on whether £4,000 MPAA will allow the continued successful roll-out of auto-enrolment and whether it would impact disproportionately on any particular groups. We hope they’ll consider the impact this has on flexible working, and the potential impact it could have on pension contributions for those working flexibly in later years.”