The government raised nearly five times more income tax than expected in the first year of pension freedom, documents released alongside the 2017 Spring Budget have revealed.
While HM Treasury was expecting an extra £0.3bn in tax in the 2015/16 tax year as a result of pension freedom, it ended up raising £1.5bn. The £1.1bn it now expects to raise this tax year is itself almost double the initial £0.6bn estimate.
Just group communications director Stephen Lowe explained: “People have been taking far larger average withdrawals than originally expected, which has meant much more has been paid in income tax.
“It was expected that people taking lump sums out of pensions would spread them over four years – but instead they have taken bigger amounts more quickly, leading to higher tax rates and larger tax collection.”
He continued: “The problem is we really don’t know if this is starting to turn into a major problem or not – there are no systems in place to look across people’s pensions in aggregate, so we have little idea of who is taking the money and what they are doing with it.”
‘Clearly a concern’According to Prudential retirement expert Vince Smith-Hughes, the figures raise “interesting questions” about how people are using pension freedom.
He said: “It is clear from this data 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than originally expected, this having been caused by larger withdrawals – including in some cases all of the fund being withdrawn in one go.”
Smith-Hughes added: “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.”
Pension freedom, introduced in April 2015, allow pensions savers aged 55 or over with defined contribution schemes to access their pots early, subject to tax paid at a marginal rate rather than the 55% previously in place.
As of January 2017, £9.2bn had been flexibly accessed since the introduction of the policy, with almost 400,000 payments from pensions pots flexibly accessed in the last three months of 2016 alone.
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