Treasury rule change on pensions jeopardises retirement saving plans for millions

Tom McPhail argues why government plans to reduce pension freedoms is a step backwards for effective retirement planning.

reduced pension freedom

A Treasury consultation to reduce the amount people can save into their pension once they have used the new pension freedoms, is causing widespread alarm across the pensions industry on behalf of investors.

Hargreaves Lansdown, a company that describes itself as the 'investment supermarket for private investors', is submitting to the Treasury a highly critical response to its proposal to cut the Money Purchase Annual Allowance from £10,000 a year to £4,000.

  • The Money Purchase Annual Allowance consultation closes on 15 February. You can view a copy here
  • Over 500,000 investors, mainly in their 50s, have already used the pension freedoms to flexibly access their pension and so are immediately caught by this reduced allowance for future pension saving.
  • Changing work patterns, including later life working, job breaks to care for elderly relatives and retraining all mean more and more people will need temporary access to their pension savings before resuming earning and saving.
  • Members of occupational defined contribution pension schemes written under trust are particularly at risk as many won’t have the option to use drawdown.
  • Auto-enrolment is extending pension participation, meaning more and more savers in their 50s and 60s risk being hit with an unexpected tax charge.

Speaking about the plans to reduce pension freedom from people seeking to access their pension, Tom McPhail, Head of retirement policy at Hargreaves Lansdowne, said: “This proposal is symptomatic of a government that has lost sight of the importance of putting individuals first. It is the worst kind of policy-making: it inconveniences and disproportionately penalises millions of ordinary investors and its barely going to save the government any money.”

“We have searched hard for a solution to the questions posed by the Treasury; we have consulted with industry peers; we have looked at it from every possible angle and in the end our only answer to the Treasury is: ‘Just don’t do it’.”

“Nationally we are trying to promote a culture of saving and investing for our future. With the decline of traditional final salary pensions, individuals have to take responsibility for their own retirement. It is up to the pensions industry, employers and the government to help them. This makes it all the more disappointing when you see the government proposing policies which undermine our ability to help investors achieve their goals.”

Hargreaves Lansdown has recommended the Treasury drop this proposed policy change entirely. For now the Money Purchase Annual Allowance should stay at £10,000.

How much of a problem is this likely to be?

According to HMRC data, over half a million investors have already taken advantage of the flexible access rules created by the new pension freedoms. Any of these individuals who want to make further pension savings could be caught by this proposed rule change. You can find the data here.

Analysis of Hargreaves Lansdown investors who have used the new Uncrystallised Funds Pension Lump Sum (UFPLS) rules shows that a substantial proportion, 41% are under the age of 60; for these investors there is a high likelihood that they’ll want to make further pension investments in the future.

Uncrystallised Funds Pension Lump Sum (UFPLS)

What about auto-enrolment?

Someone who accesses their retirement savings and is subsequently enrolled into a workplace pension could fall foul of the proposed new rule, but how much would they have to be earning to be at risk of breaching the limit?

The answer is not very much. Assuming a 10% pension contribution rate, which is higher than the current auto-enrolment minimum but still lower than the 12% contribution rate which is generally recognised to be a good target rate, then anyone earning over £40,000 a year could be hit with a tax charge:

Money Purchase Annual Allowance


Maximum Earnings before allowance breach at 10% contributions


Maximum Earnings before allowance breach at 12% contributions


£10,000 (Current Limit)

  £100,000   £83,333

£4,000 (Proposed Limit)

  £40,000   £33,333

How do the tax charges work?

Anyone who has triggered the Money Purchase Annual Allowance, whose total pension contributions subsequently exceed the limit could get hit with a tax bill. HMRC apply a tax charge equal to the tax relief granted on the excess pension contributions.

Example: Theresa takes 4 years off work at the age of 57 to care for her elderly mother. She draws on her pension for 4 years to provide herself with an income while she is not working. She subsequently goes back to work and needs to rebuild her pension. She is auto-enrolled into her workplace pension on a total contribution of 12%. Because she earns £50,000 a year, her pension contributions total £6,000. This means she has to pay 40% tax on £2,000 of contributions, so her pension will cost her £800 (This assumes the MPAA has been reduced to £4,000).

Pension tax facts

The Treasury rationale for the existence of the MPAA and now for extending it, is that investors could draw money out of a pension, and then subsequently reinvest it in a new pension, thereby scooping up extra tax relief.

  • The amount of tax relief the Treasury predicts it will save is negligible, £70 million a year out of an annual bill of £48 billion. This is less than 0.15% of the total annual pension tax relief.
  • Defined Benefit pensions take up around 85% of pension contribution tax relief, whilst only around 15% goes to Defined Contribution investors.
  • There are around 7 million active members of Defined Benefit schemes, compared to around 16 million Defined Contribution scheme members (personal pensions and occupational DC).
  • This measure is targeted solely at Defined Contribution savers, whilst those lucky enough to receive a Defined Benefit pension will be free to recycle their pensions: the Treasury rule change won’t stop them at all.
  • The Treasury argues that if investors can no longer use pensions, they can always use ISAs instead. This is tantamount to the Treasury arguing it doesn’t see the point of pensions anymore (we are very alarmed about this; there really does seem to be people working in the Treasury who would be happy to dismantle the current system of pension tax breaks).
  • Increasing numbers of people are working flexibly through their 50s and 60s. This might be due to changing employment patterns or it could simply be that they are caring for an elderly relative. We believe it is wrong for the Treasury to penalise them.
  • Increasing numbers of auto-enrolment scheme members will be caught by these restrictions.

What can you do if you don't agree?

If the proposals made in the ongoing consultation are adopted, achieving true flexibility in retirement will diminish. If you are disappointed with the proposals to reduce the money purchase annual allowance you can write to your constituency  MP.

Or you can write:

Pension and Savings Team
HM Treasury
1 Horse Guards Road

Email: [email protected]


Last modified: June 10, 2021

Written by 11:55 am News & Views