Time to do away with the MPAA
The Autumn Budget is fast approaching and this is the Chancellor’s opportunity to announce any tax or funding policies for the next 12 months. This particular Budget comes at a time of unrest within the Tory party and we are left with a strong sense of uncertainty about what the UK will face in the coming months. Together with Brexit, NHS spending and austerity, the Chancellor already has his hands full so it is unlikely he will make any shock announcements regarding retirement policies.
Nevertheless, this time of year provides a perfect opportunity to reflect on changes we feel need to be made and policies that should be scrapped. One of which is the bothersome Money Purchase Annual Allowance or MPAA for short.
After triggering the MPAA you are only able to contribute up to £4,000 into money purchase schemes each year before you have to pay tax charges.
The measure was introduced to prevent tax manipulation by limiting significant contributions after an individual has flexibly accessed their pension. However, there is little evidence to show that the MPAA is even fulfilling its intended purpose of reducing the ability to recycle. The Government is yet to confirm any amount of tax that has been collected, or more importantly saved, through the policy.
Instead it is penalising older workers who greatly require flexibility in later life. Retirement is no longer perceived as a final destination; it is instead a process that takes place over many years. Working full or part-time into old age will inevitably become more common and the ability to stagger retirement will be essential.
Furthermore, the ethos of treating customers fairly does not seem a natural fit for the MPAA as it isn’t applied consistently across all forms of drawdown. An individual in capped drawdown can take taxable income below their annual capped drawdown limit and not trigger the MPAA whereas the same individual in flexi-access drawdown taking the same or a smaller amount of taxable income will trigger the MPAA and significantly reduce their ability to make further contributions. This doesn’t strike me as being fair or easy to understand for the consumer.
The MPAA is arbitrary for several reasons but it also requires an unrealistic level of consumer awareness. It relies on member engagement, which simply does not exist. Rules force savers affected by the MPAA to communicate with their other pension providers if they start saving elsewhere. Creating a policy that not only requires members to engage with correspondence sent to them, but also requires them to take further action (sometimes years down the line) is problematic.
According to Prudential research back in April 2018 64% of over-55s say they are confused by the regulations and the overwhelming majority – 82% – want an end to any further Government changes to pension rules.
Many of these complexities are reducing the public’s trust in an already overly complicated pension system and the Government would be well advised to simplify matters.