The proposed reduction to the amount savers can put back into a pension once they have started taking an income appears to have been given a temporary stay of execution.
Last November chancellor Philip Hammond announced that the so-called money purchase annual allowance (MPAA) will be cut from £10,000 to £4,000. The move was an unpopular one, with experts – including Steve Webb, director of policy at Royal London– arguing the reduction 'flies in the face of efforts to make retirement more flexible'.
The cut was set to come into force at the start of the new tax year – 6 April – but the proposal has been left out of the Finance Bill, so therefore has not been given the green light. This comes as a shock to financial advisers, who have been counselling their clients to reduce their pension contributions to just £4,000 this tax year.
But this move is expected to be temporary, as the main driving force behind its exclusion is the upcoming general election. The election will take place on 8 June and parliament is dissolved on 3 May in preparation for it, so prime minister Theresa May faces a race against time to get the Finance Bill 2017 through the House of Commons, which is why certain proposed changes have been left out.
Richard Parkin, head of pensions policy at Fidelity International, downplays the exclusion.
‘I’d love to believe that government has changed its mind on the MPAA reduction, but it seems that it’s just a temporary casualty of the pre-election wash-up period. However, because parliament is being dissolved, the bill can’t carry over and a new bill will need to be introduced after the election.
‘That at least gives the opportunity for government to rethink this policy, which we believe will have a negative impact on those saving responsibly for their retirement.’
Tom McPhail, head of policy at Hargreaves Lansdown, agrees that investors should continue to assume that by the end of this tax year the MPAA will be reduced.
‘Politically, it makes sense to ditch unpopular policies during an election campaign, in order to avoid upsetting voters. The MPAA cut is particularly pernicious as it is retrospective. We do currently expect to see these changes reintroduced the other side of the election, in the event of a Tory victory,’ adds McPhail.
Other changes that have been temporarily put on ice include the £1,500 tax-free pension advice allowance, which enables people to withdraw £500 on up to three occasions from their pension pots tax-free, to put towards the cost of pension and retirement advice from April 2017.
In addition, the proposed reduction in the tax-free dividend allowance from £5,000 to £2,000 next April was also dropped from the Finance Bill.
According to Blick Rothenberg, the accountant and tax practice, it is expected that a second Finance Bill will be published after the election and the majority of the dropped changes will be re-introduced and backdated to have effect from 6 April 2017.
Nimesh Shah, partner at Blick Rothenberg, adds: ‘It is unbelievable that such important provisions have been dropped at the 11th hour, after the painful amount of work that has gone into the process to finalise the legislation.’