Pensions: Still piling on the complexity

We often grumble in MoneyWeek about the escalating complexity of the UK’s pension system. We’re not alone in this of course; practically everybody in the financial services industry agrees that pensions regulations are now subject to such incessant change that most people who aren’t obliged to follow them for a living struggle to understand how best to save for retirement.

Still, even by the dire standards we’ve come to expect, the government has excelled itself with the money purchase annual allowance (MPAA) farce. Last year, the chancellor declared that the maximum amount that somebody who is taking benefits from a pension scheme under the flexible access arrangements can contribute to a defined contribution (money purchase) pension would be cut from £10,000 to £4,000 with effect from 6 April 2017 (this includes employer contributions).

You may think that this is a good idea and will reduce the opportunity for people to get two rounds of tax relief on their pension contributions (pay money into a pension, get tax relief on the contributions, take it out later, pay into a second pension, get tax relief again). You may think it’s an unfair tax grab that will hurt those who want to draw some of their benefits while carrying on working part-time and taking advantage of pension benefits their employer offers.

There’s an argument to be made either way. What’s not arguable is that this simple tweak has turned into a mess. The limit was supposed to be changed in the annual finance bill in April – but due to the snap election, this bill was shorn of any controversial measures in an effort to push it through as quickly as possible.  The MPAA cut was one of the measures that were dropped.

The government was expected to include this in a new bill once the election was over, with the cut being retrospective to 6 April. However, the loss of the Tories’ majority at a time when the government has other priorities is likely to mean significant delays in passing stray legislation such as this. And the longer it’s delayed, the less certain it becomes whether it can be backdated to 6 April, whether it will be postponed to 6 April 2018 or whether it might even be ditched. That’s quite a headache for anybody who is potentially hit by this change and wants to work out what they should do to stay on the right side of HMRC.

In one sense, this is a small irritation – it won’t affect the majority of savers. But it’s indicative of what a tangled mess our pensions system has become. Genuine simplification is badly needed. It would be nice if by the next time we produce our annual pension supplement, we can be writing about what those reforms are.

Cris Sholto Heaton