Finance experts are warning that the latest government plan to move the goalposts on pensions threatens to throw retirement plans into chaos for millions of people. The change was announced in the Autumn Statement, but sounded obscure enough not to ring alarm bells at the time.
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The rule change is the reduction of the so-called Money Purchase Annual Allowance - from £10,000 a year to £4,000 a year. It can affect anyone who plans to take advantage of pension freedoms after the age of 50, and continue working and contributing to a pension afterwards.
This is a fast-growing group, because we are starting to view later life differently. When before we might have worked to 60 or 65 and retired, now we may reduce our hours temporarily or permanently, take a break to care for elderly relatives, or retrain to start a new career in our 60s. All of these things mean we may well need to withdraw something from our pension, and then return to working and saving for a pension.
Hargreaves Lansdown crunched the numbers and points out that anyone who has previously dipped into their pension, and then continued working and contributing 10% of salary could face a tax charge if they earn more than £40,000 a year. Anyone contributing the recommended 12% of salary would breach it after earning £33,333. Anyone who breaches the limit will be hit by a tax charge from HMRC - clawing back the pensions tax relief.
Hargreaves Lansdown uses the example of a 57-year-old woman who takes four years off work to care for her elderly mother. She draws on her pension for four 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.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, points out that in these circumstances, she would be better off saving into an ISA instead - which is a worrying indication that the Treasury still sees ISAs as the future of retirement savings.
McPhail says: "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'."
The government will consult on the change until 15 February, when it will make a decision on whether to proceed as planned.