Pension freedoms could generate as much as £1.9bn a year in tax revenue for the next 10 years, according to research by the Pensions Policy Institute (PPI).
In a briefing note published 15 October, the PPI said that, based on the way members have accessed their pension savings since the pension freedoms were introduced in April 2015, HM Revenue and Customs (HMRC) could see increased tax revenue of £19.2 billion over the next decade.
The PPI found that, following Freedom and Choice, more than half (54%) of defined contribution (DC) pots accessed have been fully withdrawn, nearly a third (30%) have entered drawdown, some 13% have been used to purchase an annuity, and 3% have been accessed through an uncrystallised fund pension lump sum.
Also, some 21% of pots worth between £50,000 and £99,000 have been annuitised – higher than the 13% of pots annuitised among all pot sizes.
Based on these figures, the PPI estimated that individuals with considerable DC savings and some defined benefit (DB) entitlements could end up paying 200 times more for full withdrawal at state pension age compared to purchasing an annuity.
‘Considerable uncertainty’
Policy researcher Lauren Wilkinson, said that there is “considerable uncertainty around the impact that pension freedoms may have on tax and means-tested benefits in the future” both in terms of individual impact and what it could mean for state finances on an aggregate level.
Wilkinson said: “Some of the increases will result from the fact that people are reaching retirement with higher levels of DC savings, which means they may be offset by higher levels of tax relief received during the accumulation phase.”
“Calculating the impact on means-tested benefits is more complex as it is sensitive to individual saving levels, retirement income decisions and potential application of the deprivation of assets rule,” she continued. “The impact could also be reduced by low levels of take-up of means-tested benefits among people over pension age.”
So, what a person would pay in tax could vary widely, depending on how they accessed their savings but annuitants could end up paying the least in tax, the PPI added, while drawdown options can also be tax efficient depending on the withdrawal rate used.
Earlier this year, HMRC was forced to repay £27m in tax payments to pension freedom users, with more than 10,000 repayment forms processed between April and June. The department revealed a record £1.9bn had been flexibly withdrawn from pensions during the same period.
In May, the Office for Tax Simplification urged HMRC to review the usage of emergency tax codes for lump sum pension withdrawals, which generally results in the deduction of too much tax when the payment is made.