HM Treasury yesterday confirmed it will legislate to cut the MPAA to £4,000 and this will apply from 6 April 2017. The limit was previously £10,000.
The policy has faced criticism from advisers and pension sector specialists.
The MPAA was introduced following the pension freedoms in April 2015, and restricts the amount a person can contribute to a defined contribution pension if they have accessed their pension savings flexibly.
Andrew Tully, pensions technical director, Retirement Advantage, said: “Unfortunately, awareness levels of the MPAA among the general public is low, so it’s inevitable people are going to be caught out by this change and face a hefty tax charge if they’ve paid in over the allowance.
“One of the key benefits of the pension freedoms was the ability to phase withdrawals to fit in with the increasingly flexible approach many people have to later life – taking sums to top up other income, or as a bridging pension until state benefits kick-in.
“Now the freedom to withdraw funds from 55 needs to be accompanied by flashing warning lights, although as many will cash-in without advice they may not be noticed until people are well past the stop sign.”
Old Mutual Wealth’s head of retirement policy Jon Greer called it a “regressive curb” on the standard annual allowance but said there will be relief to finally receive clarity on the matter.
He said: “The industry will be pleased to be able to advise appropriately on this change that has been stuck in limbo for months. This policy has been a thorn in financial advisers sides as it made it difficult to advise some clients, who could be affected, with any degree of certainty.
He added: “The cut to the MPAA is at odds with the direction of travel in the retirement market and those planning for retirement.”