Last year’s pension freedoms raised £200m more than anticipated for the Treasury, according to a report published alongside yesterday’s (16 March) Budget.
The economic and fiscal outlook report from the Office for Budget Responsibilty found receipts from pension withdrawals relating to the reforms introduced in April are expected to be around £900m for the whole of 2015 to 2016, almost 30 per cent more than forecast.
It also found there has been a reduction in spending on the state pension of 0.2 per cent of GDP because of government reforms raising the state pension age.
The report stated: “This fall is driven entirely by the caseload rising more slowly than the total population as the state pension age rises.
“In contrast to working-age benefits, the basic state pension award is expected to rise mainly in line with earnings due to the triple lock on uprating, so average awards have little effect on state pension spending as a share of GDP.
“Indeed, with awards rising by 2.5 per cent in 2017 to 2018 – higher than CPI inflation or average earnings – average awards push spending up slightly as a share of GDP.”
Between 2015 to 2016 and 2020 to 2021 spending on items subject to the welfare cap - predominantly working-age welfare spending - is projected to fall by 1.9 per cent but spending on items outside the cap - largely state pensions - is expected to increase by 15.7 per cent.
Last year the OBR stated original estimates for the cost of the state pension triple lock pledge - which sees payments guaranteed to rise in line with whichever is the highest of earnings, inflation or 2.5 per cent - were £0.4bn in 2014/15, but because of higher inflation and lower earnings it has ended up costing £2.9bn.
The introduction of voluntary national insurance contributions in the 2014 Budget has also had an impact on the state pension, according to the OBR.
The report stated: “This measure enabled pensioners to acquire additional state pension in exchange for a lump sum national insurance payment at an actuarially fair price.
“Take-up has been much lower than expected, although the average amount contributed has been higher.
“We now expect receipts of around £65m in both 2015 to 2016 and 2016 to 2017, compared with original estimates of £435m in both years.”
Adviser view
Jason Witcombe, director at London-based Evolve Financial Planning, said: “No doubt there is an element of consumers not realising exactly what tax is going to be paid but equally I think there are situations where people will have appreicated the freedoms and will have taken a view that they want a larger amount to do something with it in full knowledge that it will be taxable.”
