Finance Bill

Written evidence submitted by Mark Coulter, Technical Consultant, Kerr Henderson (Financial Services) Ltd. (FB01)

Finance Bill 2017-19 ("the Bill")

1. Background
I am a Technical Consultant at Kerr Henderson (Financial Services) Limited (FCA 125322). It is part of my function to analyse changes to pensions legislation and to outline to authorised individuals in our firm how these changes affect the advice they give to their clients. In that context, this is my own analysis of the proposal which I have shared with my colleagues but without any requirement for them to respond to me.

2. Subject: Part 1, section 7, Money Purchase Annual Allowance
The Bill confirms the reduction of the Money Purchase Annual Allowance from £10,000 to £4,000 from 6 April 2017.

3. Observations
The proposal creates an anomalous position that is best illustrated with an example.

Assume 2 individuals both have total pension funds of £100,000 to which they are each contributing £10,000 per annum.

Mr A has three arrangements valued at £10,000 and a fourth arrangement valued at £70,000.
Mr B has a single arrangement valued at £100,000.

Both individuals wish to crystallise a total of £10,000 whilst continuing with contributions.
The Money Purchase Annual Allowance has reduced to £4,000.

Mr A can use the small pot commutation rules to crystallise one of his £10,000 arrangements. He will not trigger the Money Purchase Annual Allowance and may continue with his £10,000pa contributions. He will also retain the facility to carry-forward unused Annual Allowances from previous years.

Mr B does not have any small pots, so crystallising £10,000 of his pension fund as £2,500 PCLS and £7,500 taxable income will trigger the Money Purchase Annual Allowance. Contributions will be limited to £4,000 and he will lose the facility to carry-forward unused Annual Allowances from previous years.

Thus, two individuals with the same amount of pension savings and wishing to draw down exactly the same amount of pension funds, will have totally different outcomes, one triggering the Money Purchase Annual Allowance and losing all unused Annual Allowances from previous years, whilst the other faces neither of these consequences.

4. Risk
Mr B may be inclined to restructure his pension arrangements by partially-transferring three amounts of £10,000 to different arrangements so that he can make use of the small pot commutation rules like Mr A. This seems to conflict with the intended use of the small pots rules, which were to assist individuals to easily dispense with small pots – not to deliberately create them.
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5. Conclusions
The reduction of the Money Purchase Annual Allowance to £4,000:

a. will create an anomalous position

b. may encourage manipulation of pension arrangements to use the small pots rules to circumvent the MPAA rules

c. will create a differential position between members of occupational arrangements and personal schemes and

d. may prove to be totally ineffective as a result of the above.

6. Suggested amendment

Withdraw the reduction of the Money Purchase Annual Allowance and retain at £10,000.

September 2017