Money purchase annual allowance

Finance Bill – in a Public Bill Committee am 10:15 am ar 17 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury 10:15, 17 Hydref 2017

I beg to move amendment 17, in clause 7, page 15, line 11, at end insert—

‘(4A) After section 227G (when pension rights are first flexibly accessed), insert—

(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes made to this Act by section 7 of the Finance (No. 2) Act 2017.

(2) The review shall consider in particular—

(a) the change to the tax charge applied in each tax year, and

(b) the behavioural effects of the changes.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”’

This amendment would require HMRC to undertake a review of the effects of the change to the money purchase annual allowance in Clause 7.

With this it will be convenient to discuss clause 7 stand part.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

The money purchase allowance has its roots in the latter days of the previous Chancellor’s tenure at the Treasury. The pension flexibility measures that were introduced in 2015 gave pensioners those flexibilities if they wished to pay anything further into a defined-contribution pension, but restricted the contributions on which they could receive tax relief. The Government set the money purchase allowance at £10,000, limiting the tax relief that pensioners could receive. The clause will cut that drastically, to £4,000.

The Minister says that the clause is, in effect, an attempt to stop individuals who have already accessed pension savings recycling that cash back into pensions, thereby benefiting from tax relief a second time. I completely acknowledge the concern about that, but a number of pensioners will no doubt be caught by the change. In fact, the submissions that we all received by email and were circulated today allude to that, and I will come to that in a bit more detail.

How much notice have pensioners been given of this planned change? What marketing and targeted awareness campaigns have the Government conducted to ensure pensioners are aware of the change? How much has the Treasury or other Departments spent to ensure that pensioners are aware of the change? I come back to the point I made earlier that this is about the security of people’s retirement. People have planned and are planning for retirement and, what with Brexit and lots of other things going on in the world, we want to keep the uncertainty in life to an absolute minimum. I am sure that everybody agrees with that.

How much does the Financial Secretary believe that the measure will raise? The Opposition feel that there is a clear need for the level of the money purchase annual allowance to be reviewed, and many of the stakeholders who have written to us agree. It is important that the Government take the necessary steps to ensure that pensioners who are caught out by the change are not at an unfair disadvantage.

One submission to Members in the bundle that has been circulated indicates:

“The reduction of the Money Purchase Annual Allowance to £4,000:

a. will create an anomalous position b. may encourage manipulation of pension arrangements to use the small pots rules to circumvent the MPAA rules c. will create a differential position between members of occupational arrangements and personal schemes”.

The submission gives a perfectly reasonable example of that, which I will not go into now.

Another organisation, the Low Incomes Tax Reform Group, also has concerns. It was set up by the Chartered Institute of Taxation to give “a voice to the unrepresented”. I will quote from its submission, because it is pertinent:

“The money purchase annual allowance of £10,000 is very unlikely to catch out too many people who might do this. But reducing it to £4,000 from April 2017–equating to savings of £333 a month–is much more likely to cause problems for these people; especially if thinking about it in terms of someone choosing to save money they might have previously been paying on a mortgage. This is even easier to see as being a problem if we consider that the net of basic rate tax contribution–the amount the individual pays–would be £3,200, ie £266 per month. Such a monthly sum could well be half the person’s previous mortgage repayments and therefore an easy sum to find for topping up their pensions”.

The review laid out in our amendment seeks to review the effectiveness of the measure, how many people it affects and the impact of cutting the money purchase allowance on the overall level of pension contributions.

To conclude, I cannot reiterate this point too much. I do not think it is necessarily a question of our wanting to replace the £10,000 with £4,000, £6,000 or £8,000 or any other figure, for that matter. If the Government have made that decision—and it is reasonable to adjust the figure up or down, whatever it might be—given that this is about people’s pensions and their future in retirement, it is important that we are clear what the impact is going to be. That is why we ask for the review. We all need to satisfy ourselves that when we are dealing with this area, for which people have planned, they are not going to be detrimentally affected at a time in their lives when they may be vulnerable.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Amendment 17 would require the Government to undertake a review of the effect of the change to the money purchase annual allowance under clause 7. Before I set out why that review would be unnecessary, I want first to remind Committee members of the background to clause 7, and what it seeks to achieve. The historic pension freedoms introduced in April 2015 have given people with savings in money purchase arrangements greater flexibility to get access to their pension savings. Once a person has accessed their pension savings flexibly, further tax-relieved contributions are restricted to the money purchase annual allowance.

In the autumn statement of 2016, the Government announced that they would consult on reducing the allowance from £10,000 to £4,000, to limit the extent to which people can recycle their pension savings to get extra tax relief—something that the hon. Member for Bootle recognised in his remarks. Following that consultation, the Government concluded that an allowance of £4,000 would be fair and reasonable, restricting the extent to which some individuals can gain from an unfair tax advantage, while still allowing those who have accessed their pension flexibly to rebuild some of their savings.

The changes under clause 7 reduce the money purchase annual allowance from £10,000 to £4,000 with effect from April 2017, to help to ensure that the cost of pension tax relief is fair, affordable and sustainable. That reduction will limit the extent to which pension savings can be recycled to take advantage of tax relief, which is not in the spirit of the pension tax system. The allowance applies to individuals who flexibly access their pension savings or who have already done so.

Amendment 17 would impose a requirement on the Government to undertake a review of the effects of the change, before 30 June 2019, and to lay it before the House. I am afraid that that would be unnecessary; as I have outlined, the decision to reduce the allowance follows extensive consultation with industry and individuals. During that consultation, we received no evidence that particular groups, as a whole, would be disproportionately affected by the change. Indeed, the Government estimate that about 3% of individuals aged 55 and over make annual contributions—from themselves and their employers —of more than £4,000. Of that 3%, significantly fewer people have already accessed their pension savings flexibly, which means that the number affected will be significantly lower.

Across the population more broadly, median defined contribution pension saving is between £2,000 and £3,000 per year—so it is below the £4,000 figure that we have been discussing. Moreover, in our response to the consultation, the Government have already committed to review the level of the allowance in order to ensure that there is no conflict with automatic enrolment policy in the future.

The hon. Member for Bootle asked some specific questions about the kinds of consultation and information that we have made available to those who might potentially be affected, and I can reassure him that the measure has been well publicised. It was, as I have said, announced in the autumn statement 2016, when Her Majesty’s Treasury carried out a 12-week consultation; and the change was confirmed in the 2017 Budget.

Following the announcement of the general election and the shortened Finance Bill, the Government confirmed that the policy had not changed, and that it would be legislated for at the earliest opportunity in the new Parliament. In addition, registered pension schemes must provide a flexible access statement to individuals within 31 days of their first triggering the money purchase annual allowance. The content of the statement is explained on the website. The hon. Gentleman also asked about the cost to the Exchequer. The answer is £70 million per annum.

Providing guidance through information has been a core element of the Government’s pension freedom policies. Indeed, anyone aged over 50 can access Pension Wise for free, and get impartial Government guidance about defined pension contribution options. The Pension Wise website explains the MPAA in connection with flexibly accessing savings, in a number of sections.

The Government are committed to supporting hard-working individuals who want to save through the tax system. This year we have increased the amount of money that an individual can save or invest tax-free through the ISA by the largest ever amount to £20,000, nearly doubling the limit since 2010. As I have outlined, the pension allowances are generous, and the new MPAA remains considerably higher than median contributions.

Reducing the MPAA limits the extent to which pension savings can be recycled, while allowing those who want flexible access to pension savings the opportunity to rebuild some of their savings, should they choose to do so. The Government have consulted on the change and are confident that it is the right decision. I therefore urge hon. Members to withdraw the amendment and I commend the clause to the Committee.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury 10:30, 17 Hydref 2017

In the spirit of co-operation and the assurances the Minister gave, I am prepared to withdraw the amendment in relation to a review. None the less, serious concerns have been identified by organisations. The Minister alluded to the fact that there did not appear to be much concern, but that is not what I am hearing, hence the need for a review. However, in the light of the Minister’s assurances, I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 ordered to stand part of the Bill.

Clause 8