HM Treasury’s original forecast of a £320m boost to tax revenue from pension freedoms is probably half the true total, Hargreaves Lansdown said, claiming that the Treasury’s tax take is likely to be nearer to £700m this year as a result of a distortion in HM Revenue and Customs’ data.
Tom McPhail, head of pensions research, Hargreaves Lansdown, has warned because of short term issues, HMRC’s reporting of tax revenue data is unlikely to be an accurate reflection of the longer term picture.
He said HMRC data will be distorted in the early months for two reasons. Firstly because many payments are taxed under an emergency tax code which results in an overpayment of tax. Pension investors can then subsequently reclaim the overpayment but it will take some weeks or months to sort out.
Secondly because many pension investors are currently being thwarted by their pension provider’s inability to comply with their payment requests.
Mr McPhail said: “It looks as if the chancellor could be in for a handy windfall, thanks to his pension reforms.
“It is important to bear in mind though that this will simply bring forward tax revenues and consumer spending which would otherwise have been paid out over the years and decades to come.
“It also underlines the importance of maintaining a stable pension system which continues to encourage and reward responsible long-term savings habits.”
Normal market turnover would suggest 400,000 people, Mr McPhail said, with an average pot of around £30,000; a total pension pot of around £12bn a year. This is the of level of activity the market experienced until 19 March 2014 when the Chancellor first announced plans for pension freedoms, he said.
Ignoring the fact that some of this money would be taxed at 40 per cent and some not taxed at all, if we just assume 20 per cent taxation on this £12bn, Mr McPhail said this would be paying an income of around 6 per cent giving a tax yield of £144m.
The median pension pot at retirement is around £20,000 and research shows that following pension freedom, the majority of these are just going to leave as cash.
Mr McPhail said this is broadly consistent with the initial data we are seeing which shows average cash-in values of around £12,000 to £16,500.
In addition some people with larger pots going to take the cash. Even for pots of up to £50,000, Mr McPhail said around 25 per cent plan to just take all the money in one go.
Taking this first group, Mr McPhail said if we assume that over the course of 2015 to 2016 then 200,000 people take a pension pot with an average value of £15,000 and pay 15 per cent tax, then this would generate £450m in tax revenues.
Mr McPhail’s comments come after Hymans Robertson predicted at least £6bn will be taken out of pension pots in the first year of the freedoms, significantly more than the £320m estimated in the 2014 Budget and the upward revision to £415m made in the Autumn Statement.
Last month the consultancy noted that this would mean a £1.2bn in tax take for the Treasury in this financial year.