Savers cashing in their pension pots has led to the government raking in almost twice the tax it estimated the new pensions freedoms would generate. Experts expected that people withdrawing cash from their pensions would spread the withdrawals – but savers have taken bigger amounts in one go, leading to more cash in the Treasury’s coffers, reports The Spectator.
Since April 2015 pension savers have had much more freedom about what they do with their defined contribution pension savings. From the age of 55 they can take the money as cash, buy an annuity, use income drawdown, or combine two or more of the options. Savers can withdraw 25 per cent of their pot tax-free while other withdrawals are taxed at the saver’s marginal tax rate.
The Treasury expected pension flexibility to raise £0.3bn in 2015/16 and £0.6bn in 2016/17. But actual tax receipts were much higher: £1.5bn in 2015/16 and £1.1bn in 2016/17.
The figures were published in policy documents released alongside last week’s Budget. The documents showed the Treasury has upgraded its forecasts of tax revenues from the pension changes for 2017/18 to £1.6bn from an initial estimate of £910m made in 2014.
Vince Smith-Hughes, retirement expert at Prudential, says the Treasury figures raise interesting questions about how people are using pension freedoms. ‘It is clear from this data that the tax taken from pension freedoms is considerably higher than originally expected – this having been caused by larger withdrawals – including in some cases all of the fund being withdrawn in one go,’ he says, ‘This will be the right decision for some people who have other income sources, but clearly is a concern if unsustainable levels of income are being taken by others where the income from the pension is critical to maintaining a reasonable standard of living, and highlights the value of advice and guidance.’
Pensions expert Ros Altmann agrees it’s tricky to draw many conclusions from the figures as the financial situations of the people withdrawing their cash are unknown. ‘The Government needs to conduct some proper research into what people are doing when withdrawing pension money,’ she says.
The Budget also saw the government continue its clampdown on overseas pensions. Anyone who wants to move their UK pension offshore into a ‘Qualifying Registered Overseas Pension Scheme’ (QROPS) – normally because they have moved abroad – will have to pay a 25 per cent tax charge on the funds transferred.
The government claims that only a ‘minority’ of transfers will be affected, and that the move will help to crack down on pension scams. But Gary Smith, financial planner at Tilney, says this could have big implications for those who seek to retire abroad.
‘The transfer will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area or the QROPS is provided by the employer,’ he says, ‘If this is not the case, then there will be a 25 per cent tax charge on the transfer and the tax charge will be deducted before the transfer proceeds. This would be an issue for ex-pats who say retire to Spain but transfer into a QROPS based in Guernsey, as this would incur the 25 per cent tax charge.’
The Budget also saw the Government confirm a reduction to the Money Purchase Annual Allowance (MPAA). The MPAA, which restricts the money the over-55s can invest in their pension after making pension freedom withdrawals, will fall from £10,000 a year to £4,000 a year from April 6. The idea is to stop people recycling pension contributions to claim double tax relief.
Les Cameron, head of technical at Prudential, says many ordinary savers who have accessed their pensions may be caught by the new limit. ‘Someone earning the national average income and who is a member of a good-quality workplace pension could easily be caught out,’ he warns, ‘Some may have to choose to reduce their pension contributions to avoid the tax charge for breaching the new £4,000 limit.’