The Autumn Statement, delivered by the Chancellor on 23 November 2016, largely left pensions alone. However, the Government did announce that the money purchase annual allowance (MPAA) will be reduced from £10,000 to £4,000 from April 2017.

In this article we consider the main announcements in the Autumn Statement affecting pensions, starting with the change to the MPAA.

Tax relief under pressure again

The MPAA is the annual limit on the amount of tax-relieved saving individuals can make to a defined contribution (DC) scheme after they have drawn their pension savings flexibly. It was introduced in April 2015 so that members who accessed their pension flexibly could continue to contribute into a pension in order to rebuild their pension savings.

To prevent individuals from exploiting the tax system and gaining a second round of tax relief (for example, by taking an uncrystallised funds pension lump sum and reinvesting the money into a pension scheme by making additional pension contributions), the Government set the MPAA at £10,000. Even so, a person who acts in this way, investing up to £10,000 of earnings tax free into a pension whilst drawing on existing DC pension savings, reduces his tax bill by 25% - at the level of £10,000, this means £1,125 for an additional rate taxpayer.

In its consultation paper issued on the day of the Autumn Statement, the Government acknowledges that setting the MPAA at £10,000 initially helped to deliver a smooth introduction of the pension flexibilities, but it does not believe that this limit is needed or appropriate on an ongoing basis. It states that only 3% of individuals aged 55 and over make DC contributions of more than £4,000 a year.

Rejecting a return to a complete ban on further DC contributions, the Government’s stated aim is to set a level of tax-relieved pension saving which will not encourage recycling. It proposes that this level of saving should be £4,000.

The consultation paper does not suggest any change to the way in which the MPAA interacts with the Annual Allowance (AA). At present, if a person who is subject to the MPAA also accrues defined benefit pension rights, the total AA for defined benefit and DC savings remains at the standard £40,000. DC saving is subject to the MPAA and, if it exceeds the MPAA, any excess is charged to tax. However, the AA available for defined benefit accrual is also reduced to £30,000 (plus any unused AA carried forward) and the defined benefit accrual is tested against this alternative annual allowance, so no amount is tested twice. It seems that this test will continue unchanged except for the level of the MPAA.

The Government is keen to stress that a MPAA of £4,000 is above the minimum contributions required under automatic enrolment legislation. Although there is no direct link between the MPAA and automatic enrolment minimum contributions, the Government intends to ensure that the MPAA remains at a level that does not impact on any future changes to the minimum level of contributions for automatic enrolment purposes. It adds that “the MPAA will be kept under regular review”.

As well as consulting on the amount of the MPAA, the Government asks whether any groups are likely to be affected disproportionately by a £4,000 limit, for example, individuals who have divorced or separated, been made redundant or been declared bankrupt.

The consultation closes on 15 February 2017. The Government will confirm the level of the MPAA in the Budget 2017 and the change is expected to take effect in April 2017.

Although this consultation represents tinkering with pensions tax relief rather than a major change, some have suggested that it is a sign of greater changes to come. In response, the Treasury commented “The Chancellor did not announce any further changes to pension tax relief in the Autumn Statement and has no plans to do so.” Only time will tell….

Other announcements

Pension scams

The Government promised to consult on a range of options to tackle pension scams. On 5 December 2016, the DWP and HM Treasury published a consultation paper on a package of measures aimed at tackling three different areas of pensions scams:

  • a ban on cold calling in relation to pensions to help stop fraudsters contacting individuals
  • limiting the statutory right to transfer to some occupational pension schemes so that trustees can block pension transfers when there are concerns over the legitimacy of the receiving vehicle, for example, where the individual does not receive any income from the sponsoring employer of the receiving scheme – the Government is consulting on “clear, objective criteria” regarding the grounds on which transfers could be blocked
  • making it harder for fraudsters to open small pension schemes.

The consultation closes on 13 February 2017.

Salary sacrifice

The Government confirmed that although it will remove the tax and employer National Insurance advantages of salary sacrifice schemes from April 2017, pension salary sacrifice arrangements and several other arrangements, such as childcare vouchers and cycle to work schemes, will be exempt.

Foreign pensions

The Government announced that it will:

  • bring foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones
  • close “section 615” schemes (pension schemes for those employed abroad) to new saving
  • extend from 5 to 10 years the taxing rights over recently emigrated non-UK residents’ foreign lump sum payments from funds that have had UK tax relief
  • align the tax treatment of funds transferred between registered pension schemes
  • update the eligibility criteria for foreign schemes to qualify as overseas pension schemes for tax purposes.
Taxation of dividend distributions to corporate investors

The Government intends to modernise the rules on the taxation of dividend distributions to corporate investors in a way which allows exempt investors, such as pension funds, to obtain credit for tax paid by authorised investment funds. It will publish proposals in early 2017.

The draft Finance Bill 2017 clauses implementing some of these changes were published on 5 December 2016.

We will update you on future developments.