Tim Middleton calls for Government to stop 'tinkering' with Pension Policy.
The reduction to the Money Purchase Annual Allowance (MPAA) in November's Autumn Statement has provoked sufficient comment in some circles to qualify it as controversial.
This alone is evidence that Philip Hammond's amendment was a poorly-understood response to a significant problem.
Let's start with some history. The A-Day reforms of a decade ago replaced a tax regime based on absolute limits on emerging benefits (by implication, a DB regime) with a series of allowances on contributions (by implication, a system designed for DC schemes).
For the first time, it became possible to continue to pay contributions into a registered pensions arrangement after benefits had been withdrawn, as full concurrency allowed members to pay into more than one scheme.
This created an immediate problem.
A tax-free lump sum could, in theory, be withdrawn from one pension scheme and immediately re-invested ('recycled') into another, thus enjoying illegal tax relief.
By 2011, the Annual Allowance (AA) had risen to £255,000.
There was therefore ample scope for significant recycling and, whilst the practice was illegal, the onus was on HMRC to demonstrate that a contribution was a recycled lump sum rather than an alternative source.
In 2011/12, the AA was reduced to £50,000 - however the motive for this was to restrict the amount of relief available to high earners rather than to curb recycling.
The introduction of George Osborne's Freedom and Choice regime exacerbated the recycling problem in that the new Uncrystallised Funds Pension Lump Sum (UFPLS) option allowed members to release a series of lump sum withdrawals.
In order to control the potential for extensive recycling the Government introduced the MPAA, which applied when members went into Flexible Drawdown or made an UFPLS withdrawal.
The full AA of £40,000 was reduced in these circumstances to £10,000. This was a pragmatic step: recycling could not be stopped, but the extent to which tax rules could be abused was restricted.
However, November's reduction of the MPAA to £4,000 suggests that recycling remains a problem.
There are no statistics available to demonstrate the extent to which tax relief has been granted inappropriately through recycling, but drastic changes to a flagship policy so soon after its implementation suggest a great deal of smoke even if there is no visible fire.
The national media response has not all been helpful. Some have complained that the Chancellor has unreasonably imposed tight constraints on retirement planning. More reasonable voices recognise that illegal exploitation of tax rules – principally by wealthier individuals – was a problem that the Government had to address.
Recycling is however part of a wider problem. The extent to which the tax allowances have been reduced in recent years has left us with a tax relief regime which, a mere decade after its introduction, is no longer fit for purpose.
It is time for Government and the industry to work together in designing a replacement, and Government must make a commitment to end its obsession with tinkering.
Pensions policy needs to work over a timeframe of several decades rather than the end of the current Parliamentary term.
Written by Tim Middleton, Technical Consultant, The PMI.