"This decision means that it will be tougher to achieve true flexibility in retirement. This makes it harder for those who want to merge working later in life with continued pension saving for their future."
Speaking during today's Autumn Statement, Chancellor Philip Hammond said: "For pensions that have been drawn-down, I will also reduce to £4,000 the Money Purchase Annual Allowance, to prevent inappropriate double tax relief."
Former pensions minister Steve Webb says that "cutting this allowance flies in the face of efforts to make retirement more flexible".
Webb added: "As soon as someone draws a pound of taxable cash using the pension freedoms, the amount they can save in a Money Purchase pension would be slashed from £40,000 to £4,000.
"This will have a profound impact on their ability to go on working and contributing worthwhile amounts to a pension. Starting to draw taxable pension cash becomes even more of a cliff-edge than at present. We should be trying to make combining work and drawing a pension easier not harder. We also need to know what will happen for people who have already drawn taxable cash expecting to be able to go on saving £10,000 per year. Any retrospective change would be totally unfair to savers."
Steven Cameron, Pensions Director at Aegon, commented: “Most people exercising pension freedoms won’t realise this currently reduces their ability to pay future pension contributions (their money purchase annual allowance) to £10,000 and most won’t want to make contributions anywhere near this in any case.
“However, reducing the cap on post freedom pension contributions to £4,000 makes it much more important to think ahead. Accessing any of your pension funds early, for example to generate a one-off cash sum while still working, to pay off a short term debt for example, could now seriously affect your future pension prospects. It could even stop you receiving the full amount your employer is prepared to contribute if this would take you above £4,000.”
Rachel Vahel, Product Technical Manager at Nucleus, added: “The government’s decision to slash the money purchase annual allowance by more than half to £4,000 is very disappointing.
“This decision means that it will be tougher to achieve true flexibility in retirement. This makes it harder for those who want to merge working later in life with continued pension saving for their future.
“However, it is worth pointing out that the £4,000 money purchase annual allowance level is less than half of contributions that can be paid into an Isa from next April. Pensions have specifically been designed as a long-term savings vehicle and the government should be encouraging everyone to save as much as they can into a pension plan.”
