Reducing the Money Purchase Annual Allowance (MPAA) could have unintended consequences

The Institute and Faculty of Actuaries (IFoA) has today (Wednesday 15th February 2017) responded to HM Treasury (HMT)’s consultation on proposed changes to the Money Purchase Annual Allowance (MPAA).

Three key findings are apparent:

• Reducing MPAA could act as a barrier to save
• Annual fluctuations in MPAA and other allowances could lead to consumer confusion and mistrust in the pensions system
• Reducing MPAA could disproportionately impact certain groups of individuals.

The IFoA’s response suggests that HMT’s priority should be to strengthen the incentive to save (as it stated in its 2015 consultation on the taxation of pensions). The IFoA believes that yearly fluctuations in the levels of allowance, such as the MPAA or the Annual or Lifetime Allowances, can leave savers confused and create mistrust in the pensions system.  A three or five yearly comprehensive review of such allowances might be more appropriate.

The response also highlights that reducing the MPAA could disproportionately impact groups for whom the changes are not intended. For example, those who stop working because they are sick, or need to care for a sick relative, and therefore need to supplement their income through accessing their pension, but then need to return to work at a later date to rebuild their pension pots, usually at an accelerated rate.

Finally, the IFoA suggests that the Government should consider developing an approach that aims to identify the ‘recyclers’ – i.e. earners who seek to take advantage of double pension tax relief, rather than focusing on the MPAA amount.

Fiona Morrison, Immediate Past President of the Institute and Faculty of Actuaries said: “Whilst we support the focus of HMT’s 2015 consultation, on strengthening the incentive to save, in this instance we would encourage HMT to avoid making short-term changes at the expense of a long-term approach to pensions policy. We believe that the planned reduction in MPAA could have unintended consequences, and so call on HMT to re-examine the potential benefits of this policy, compared to the potential risks of unforeseen outcomes.”