This is part of the Treasury’s efforts to prevent so-called ‘recycling’ of pensions as pension holders move their funds around different pension pots.

The old £10,000 limit has now been substantially reduced to only £4,000 with effect 6 April 2017. This will apply to anyone who has already accessed savings flexibly, or does so in the future, irrespective of when that occurred.

Contributions to pension schemes are tax free, provided that the amount paid in a tax year does not exceed the annual allowance, which is currently £40,000.

Following the pension freedom reforms introduced by George Osborne in 2015 when he was Chancellor, which effectively removed the compulsory requirement to purchase an annuity, pension savers have been able to access their pension pots from the age of 55.

Less well known is the fact that once a person has accessed pension savings flexibly, if they wish to make any further contributions to a defined contribution (DC) pension, tax-relieved contributions are restricted to a special money purchase annual allowance (MPAA), soon to be worth only £4,000 a year.

Defined benefit pensions are not affected by the MPAA rules.

The government claims that the cut in the allowance will affect only 3% of savers over age 55 and is expected to raise £65m in the first year of operation in 2017/18, slightly lower than original estimates. In subsequent years, MPAA will raise around £70m a year in tax.

Some respondents complained that individuals who access defined benefit entitlements do not become subject to the MPAA and that this creates inequality across different groups.

However, the government stressed that there is no flexible access – the trigger for the MPAA – in relation to defined benefit rights. While it may be possible to phase the drawing of defined benefit rights, any defined benefit rights accessed will deliver an income for life (and possibly a tax free lump sum). This is not flexible access.

The government stated that it ‘has no intention to extend the application of the MPAA to circumstances other than when savings have been flexibly accessed’.

The complexity of the different pensions schemes in the market means that there will never be real equality on this issue.

In the responses to the proposal, first set out in the Autumn Statement, concern was also raised about fairness across defined benefit and defined contribution pensions. An individual who is being pensioned through a defined contribution scheme and has accessed some savings flexibly is constrained by the MPAA on future defined contribution savings.

An individual who is being pensioned through defined benefit and also has some defined contribution savings which have been accessed flexibly is not constrained by the MPAA in relation to future defined benefit accrual. Instead, the DB provision becomes subject to the ‘alternative annual allowance’ (broadly £30,000 for an MPAA of £10,000). The current arrangements will not be affected by the MPAA change, the Treasury has confirmed.

The lack of publicity around the changes is also a concern, raised by the Low Incomes Tax Reform Group (LITRG), in its response to the initial consultation. 

Reacting to the decision to go ahead with the changes from April and brief mentions of possible subsequent reviews by government about the allowance level, LITRG chairman Anthony Thomas warned that the information currently available on the MPAA is 'disjointed, inadequate and potentially misleading' on government websites, and it is located in various different places and not clearly signposted.

The group continues to urge that this is reviewed as a priority and that it is kept under review as the programme of change for public financial guidance develops.

He also highlighted concerns about potential tax liability.

Thomas said: 'It is disappointing to note that the response to the consultation does not register our suggestion that it should be made possible for any tax charge created by exceeding the MPAA to be paid out of the pension fund itself, rather than resting with the member.

'We would be more comfortable with the proposed change if those of limited means were safeguarded from financial hardship if they unwittingly trigger a tax charge on pension savings in excess of the MPAA.'

The Treasury Consultation outcome, Reducing the money purchase annual allowance, is available here

The HMRC policy paper on MPAA reform is available here