09 Mar, 2017
Budget 2017: Pension freedoms
The government has nearly doubled the estimated tax it will raise from the pension freedoms to £1.6bn, after UK savers cashed in their pensions at a faster rate than expected.
In policy documents released on Wednesday alongside the Budget, the Treasury revised its forecasts of tax revenues from the pension changes for 2017-18 to £1.6bn, up from an initial estimate of £910m in 2014.
The pension freedoms, announced three years ago, gave savers the opportunity to spend defined contribution pension savings as they wished from the age of 55, subject to tax paid at their marginal rate instead of the 55% charge previously required.
However, the Treasury said the amounts raised from the measure had been “far more than anticipated” as people took larger amounts of cash than they would have been able to purchase through an annuity, “thereby creating a higher tax liability”.
Initially, the measures were estimated to raise around £900m from 2015-16 to 2016-17 but the policy had actually raised £1.5bn in 2015-16 alone. Meanwhile, the latest estimate for 2016-17 is £1.1bn, the Treasury said.
Stephen Lowe, group communications director at Just, a specialist financial services company, said: “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 that 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”.
The policy update came as the chancellor, as widely expected, refrained from implementing any substantial changes to pensions tax relief.
Matthew Brown, private client partner at Thomas Miller Investment, said: “Pension savers will be forgiven for breathing a sigh of relief that the chancellor has left pensions well alone”.
However, the government did confirm that it would go ahead with a controversial cut to the money purchase annual allowance from £10,000 to £4,000, effective April 6th 2017.
The move is intended to stop over-55s benefitting from tax relief twice by recycling pension cash from an old pension into a new one, something that had become more simple to do since the pension freedoms came into force.
The industry argued the reduction in the allowance would catch out ordinary savers accessing their pensions and continuing to work and benefit from a workplace pension.
Today's earlier news - Key points from 2017's Budget announcement