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Low earners will be particularly hit by the planned reduction in the pension money purchase annual allowance (MPAA) from GBP10,000 (USD12,410) to GBP4,000 a year this April, campaigners have warned.
Pension flexibilities introduced in April 2015 gave savers the ability to access defined contribution pensions as best suits their needs. However, MPAA restricts tax concessions for contributions to a pension when someone has already accessed their pension savings and wishes to make further payments. The MPAA reduction is designed to limit the extent to which individuals who have already accessed pension savings can recycle this cash back into pensions and thereby benefit from tax relief for a second time.
But the Low Incomes Tax Reform Group (LITRG) has warned that Treasury estimates that the change will affect fewer than three percent of savers may not be accurate in the future, given that it is too soon to predict what impact pension freedoms and the Lifetime ISA will have on savings patterns.
It warned that the GBP4,000 limit must be reviewed at least every three years, adding that the Government risks promoting a disjointed savings policy to the public because of the reduction of MPAA.
LITRG recommends that where the allowance is exceeded there should be an option to pay the tax due from the fund to prevent those that do mistakenly exceed the MPAA from being caused financial hardship. The group also warned that people might not understand the MPAA and how to comply with it because of inadequate guidance.
"Maintaining a reduced money purchase annual allowance is preferable to an absolute prohibition on any reinvestment into a pension," said Robin Williamson, LITRG's Technical Director. "But reducing it to GBP4,000 from April 2017, which equates to savings of GBP333 a month, is very likely to catch out people of limited means who, for example, may have taken a pension lump sum to repay their mortgage or debts, then reinvested their new-found disposable income towards their retirement."
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