The amount of money raised through the pension freedoms has far outstripped what the government had previously estimated due to higher taxes from larger withdrawals.
Figures published in the Budget revealed the tax levied on those taking money out of their defined contribution (DC) pension raised £1.5bn during the 2015 to 2016 tax year – five times the £300m anticipated when the withdrawal flexibility was announced in the 2014 Budget.
A further £1.1bn was raised from 2016 to 2017, nearly double the £600m that was previously estimated for that time period.
Higher revenue was attributed to people taking out larger sums of money than they would have been able to through an annuity, resulting in higher taxes paid at the individual’s marginal rate.
The government stated that it now expects the pension freedoms to bring in £1.6bn in 2017 to 2018 and around £900m a year for the remainder of the forecast.
The original costing assumed that individuals would spread their withdrawals over four years, but HMRC has now revised this down to three years as pensioners eagerly take money out of their savings.
The peak year of yield has also been brought forward from the 2018 to 2019 tax year to 2017 to 2018 when £1.6bn in revenue is expected.
Scott Gallacher, chartered financial planner at Leicester-based Rowley Turton, said that he was not surprised by the figures but warned that people could be taking out too much too soon.
He said that the figures indicate that people are taking out more money than they will initially need, resulting in a higher tax bill.
He added that if people are not taking advice then there’ll be “a lot more of that”, and that money could be spent on non-essential purchases.
“It’ll be interesting to see the sales figures for campervans and caravans because I suspect they’ll be through the roof.”
julia.faurschou@ft.com
