The Chancellor, Philip Hammond, delivered his first autumn statement yesterday. During a speech in which the Chancellor said he would “maintain the commitment to fiscal discipline”, the most significant pensions surprise was a reduction in the money purchase annual allowance to £4,000.
The key pensions-related announcements in the autumn statement are summarised below.
Money purchase annual allowance (MPAA) – this is the annual amount individuals can contribute tax efficiently to defined contribution pensions if they have previously accessed a pension flexibly. The MPAA will be reduced from £10,000 to £4,000 from April 2017 (to protect against “inappropriate double tax relief”). The Treasury has anticipated it will make £70 million from this change in 2017/18. It has already issued a consultation, which seeks views on whether the level of MPAA would either affect the roll out of automatic enrolment or disproportionately affect particular groups – this is open until 15 February 2017.
Pension scams – as widely trailed (and included in proposed amendments to the current Pension Schemes Bill), the government plans to ban cold calling in relation to pensions. It says it will publish a consultation on various options to tackle pension scams also including giving greater powers to block suspicious transfers and making it harder for scammers to “abuse” small self-administered schemes.
Foreign pensions – the tax treatment of foreign pensions will be “more closely aligned with the UK’s domestic pension tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones”. The government will close to new saving “section 615” schemes for those working abroad and extend from five to ten years the taxing rights over recently emigrated non-UK residents’ foreign lump sum payments from funds that have had UK tax relief. It will also align the tax treatment of funds transferred between registered pension schemes, and update the eligibility criteria for foreign schemes to qualify as overseas pensions schemes for tax purposes.
Infrastructure investment – the government will prioritise high-value investment in infrastructure.
Salary sacrifice – these arrangements were deemed by the Chancellor to be “unfair” and will be abolished from April 2017 but, as previously announced in consultation, there will be exceptions, including for pensions.
State pension triple lock – this policy guarantees the state pension will rise by whichever is highest of average earnings, the consumer price index or 2.5%. The Chancellor confirmed that the government would keep its pledge by maintaining the triple lock (for the time being).
Authorised investment funds – the government will “modernise” the rules on the taxation of dividend distributions to corporate investors in a way that allows exempt investors, such as pension funds, to obtain credit for tax paid by authorised investment funds. It plans to publish proposals in early 2017.
Yesterday’s autumn statement was Philip Hammond’s first opportunity to set out his post- referendum taxation and spending priorities. As usual, the autumn statement was preceded by rumours of radical change to the system of tax relief for pensions – on this occasion they proved to be unfounded. That is not to say, however, that major pensions tax reform will remain off the government’s agenda for the long term.
The reduction in the MPAA was announced as a reaction to government concerns over “recycling” - where people withdraw pension savings, then reinvest them in pensions, taking advantage of a further round of pensions tax relief and a second 25% tax free lump sum.
The government said in its MPAA consultation paper (published yesterday) that “the risk of acting against the spirit of the system” remained with a £10,000 MPAA and that it believes an allowance of £4,000 is “fair and reasonable”. Others may consider that the reduction in the MPAA does not sit comfortably with the notion of pension flexibility for those who wish to draw their pensions while continuing to work. In addition, the interaction with automatic enrolment could potentially prove problematic where contributions are paid at greater than minimum levels.
The focus on infrastructure investment may create more opportunity for pension schemes to invest in these projects although it is not clear how (without a change in the way pensions are valued or accounted for) the government will persuade schemes to engage in a meaningful way.
Meanwhile, the Chancellor hinted that the state pension triple lock may not continue indefinitely – “as we look ahead to the next Parliament”, he said “we will need to ensure we tackle the challenges of rising longevity and fiscal sustainability”.