The amount of money savers can pay into pensions, once they have accessed their pot will drop to £4,000 a year, the government has confirmed.
The proposal to cut the money purchase annual allowance (MPAA) from £10,000 to £4,000 was first announced by Chancellor Philip Hammond in November.
However, in the rush to clear the Finance Bill ahead of the snap general election the proposal was temporarily dropped in April.
The reduction will also apply retrospectively from 6 April 2017 and means that anyone over the age of 55 who has taken any money out of their pension will see their tax free savings allowance drop to £4,000.
In particular, the move will sting those who despite dipping into their savings, still want to maximise pension contributions in the final years of their working life – perhaps by paying in bonuses or an inheritance.
Research from Retirement Advantage has shown that 37% of people who have accessed their pensions under the pension freedoms carry on making contributions, while 19% say their employer is still paying in. Of these, 67% say they had no idea that the amounts they would be able to save going forward would be restricted.
‘Bitter blow to thousands of retirees’
Commenting on the announcement, Tom Selby, senior analyst at AJ Bell says: “This news will come as a bitter blow to thousands of retirees who have used the pension freedoms to access some of their retirement pot from age 55. Many had hoped the general election would put a legal spanner in the works and force policymakers to, at the very least, delay reducing the MPAA until April 2018.”
He adds: “We do at least have clarity on what the MPAA is for 2017/18, which means advisers and individuals can plan with a degree of certainty.”
Jon Greer, head of retirement policy at Old Mutual Wealth is equally disappointed. He says: “The cut to the MPAA is at odds with the direction of travel in the retirement market and those planning for retirement. Giving people the freedom to withdraw retirement income as and when required has made a flexible transition to retirement possible.
“Many will prefer to phase into retirement, reducing their working hours and topping up income with pensions. But under the MPAA, those that chose to top-up income with a retirement fund and then later make contributions during periods of work could be punished by this regressive curb on the standard annual allowance.”
Mr Greer also called on the government to stop tinkering with pensions legislation. “Uncertainty and changes to pensions tax rules are too often bedfellows. The recent Retirement Income Study from the Financial Conduct Authority noted that this distrust is causing people to make rash decisions about their retirement provisions and found that 'most pots are fully withdrawn and consumers withdraw their savings partly because they have limited trust in pensions.'
“We urge the new government to carefully consider its future policies and halt this unpalatable ride.”