HM Treasury will receive an extra £400m in tax from pension withdrawals in 2018/19 according to the Office for Budget Responsibility’s (OBR) fiscal outlook.
This is because "earlier cohorts are drawing down their pensions for longer", the OBR said in the 259-page long report published yesterday (29 October) alongside the Budget.
According to calculations from AJ Bell, if the Spring Budget 2017 costings were considered it would mean revenue raised from the pension freedoms this year would increase by nearly 50 per cent to £1.3bn, taking the total tax generated by the reforms to £5.5bn.
Tax raised (£bn)
**Tax take for 2017/18 and 2018/19 based on latest estimates
The pension freedoms implemented in 2015 gave savers with defined contribution pensions the option to withdraw their funds from age 55 subject to tax paid at their marginal rate rather than the 55 per cent charge previously in place.
Last year OBR figures had to be revised down because it expected £500m less in tax receipts from pension withdrawals.
Tom Selby, a senior analyst at AJ Bell, said: "The whopping £13bn cut in the OBR’s borrowing forecast for this year wasn’t the only windfall to land in the Chancellor’s pocket yesterday.
"Buried in the OBR document is a revelation the Exchequer will net a cool £400m more than expected from the taxation of pension freedom payments in 2018/19."
Mr Selby said this increase could be explained by buoyant stock markets which allowed savers to take income from their pensions for longer than expected.
He added: "Alternatively, the OBR’s initial guess may simply have been wrong.
"Either way, there is no doubt the policy has been hugely successful from the Treasury’s perspective, both in boosting the attractiveness of pensions and raising additional tax revenue."