£5.1bn bonus for UK Treasury due to pension freedoms


13 Mar, 2018

£5.1bn bonus for UK Treasury due to pension freedoms
The UK Treasury forecasts that it will receive an extra £5.1bn in taxes by April next year thanks to the government’s 2015 pension freedom policy.
Initial official predictions estimated that the initiative would raise £300m in 2015/16. However, this was considerably more than the £1.5bn that was actually raised. There was a similar story in 2016/17 when it raised £1.1bn, exceeding the previously estimated £600m.

The highly publicised, and also controversial pension freedoms were announced in the 2014 Budget by the-then Chancellor, George Osborne, to start in the 2015/16 tax year. The policy allows anyone aged 55 and over the ability to take the whole amount of their pensions as a lump sum, paying no tax on the first 25% and the rest taxed as if it were a salary at their income tax rate.
This latest forecast from the Treasury comes following a recent Financial Conduct Authority (FCA) report that states: “Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities - many people have taken the tax-free cash and some people do not understand that they have moved into drawdown.”

Meanwhile, the Personal Finance Society (PFS) has warned that a large majority of those who are taking advantage of the ‘freedoms’ are doing so without seeking professional independent financial advice.

Keith Richards, chief executive of the PFS, observes: “This is a genuine worry: pension pots were designed to carry one through the long retirement years, buying an income for life. Now it appears that barely ten per cent of all people accessing their pension pots are opting for the safety net of an annuity. We fear many will run out of cash.

“Pensions are a hugely complex area and we fear that the vast majority of people will not be able to comprehend the dynamics of volatility drag and sequencing risk - the kind of detail that is meat and drink to a professional pensions adviser.”

According to their research, 72 per cent of retirement nest eggs have been drawn down from individuals under 65. Furthermore, more than half of those pots have been withdrawn in their entirety.
The PFS says it is “concerned that there is a real risk of people running out of money in their crucial retirement years”, suggesting that advice should therefore be sought from an adviser in the first instance.

Mr Richards comments: “The original costing assumed individuals would spread their withdrawals over four years, but the latest HMRC information points to larger average withdrawals than expected – and this is a concern.

“HMRC data also suggests the average tax rate on withdrawals might be higher than originally expected which could be compounding longer term financial detriment for thousands of retirees.”

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