Autumn Statement 2016: Pension saving allowance slashed

23 November 2016

In his first Autumn Statement, the new Chancellor Philip Hammond announced plans to reduce the Money Purchase Annual Allowance from £10,000 a year to just £4,000 from April 2017.

The MPAA is the amount retirement savers are able to pay into their pension once they have accessed their savings – either by taking more than the tax-free allowance under a drawdown arrangement or by making a cash lump sum withdrawal using uncrystallised funds pension lump sum payment rules.

Fidelity International claims this could have a significant impact on savers’ abilities to take advantage of the newly-heralded pension freedoms and curtail the saving endeavours of those who have already used the pension freedoms to dip into their pot before they formally retire.


Richard Parkin, head of pensions policy at Fidelity International says: “Many pension schemes will only allow cash withdrawals in the form of lump sum payments where 25% of withdrawal is tax-free and the rest is taxable income. This was a new way of taking benefits introduced by the government to make it easier for people to take advantage of pension freedom. It is commonly used by pension plans who don’t want to support full income drawdown which includes many large company pension schemes and older pension contracts.”

He adds:  “The problem with this type of withdrawal is that it triggers a reduced limit on what can subsequently be saved into the pension plan. When this limit was £10,000 this didn’t affect too many people but at £4,000 it could really bite. While few may be saving £4,000 from their own earnings, the reduced allowance also includes employer contributions which could easily take many over the limit triggering a significant tax bill. This is not only bad news for the individuals affected but will make pension provision more complicated for employers.”

“At this stage the government is consulting on the proposals and Fidelity will be pushing hard for change but in the meantime those considering accessing their pensions flexibly should tread carefully. Those who have already accessed their savings flexibly who are still making pension contributions should review their position ahead of April next year.


"Reduction willl only affect a 'tiny minority'"

Sipp provider, AJ Bell, however says it thinks the reduction will only affect a minority of savers. Commenting on the announcement, Gareth James, head of technical resources says: “The proposed cut in the MPAA to £4,000 is likely to be relevant to a tiny number of savers and it is difficult to see how the government is going to raise anywhere near the £70 million a year it anticipates. 

“The consultation document points out that only 3% of individuals aged over 55 make pension contributions of more than £4,000 a year and our experience is that the number of people who have used the pension freedoms that make those kind of contributions is even lower.  It will be interesting to see whether the Government proceeds with this proposal once it has heard representation from the industry about the limited impact it is likely to have.”

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