Flexible access pension freedoms have triggered a tax windfall for The Treasury as retirement savers start to count the cost of drawing down their money.
With billions of pounds locked away in pension funds, new rules introduced in April 2015 allow anyone over 55 years old to take some or all of their savings – providing they pay tax on the cash they withdraw.
Pension consultants Hymans Robertson have calculated that the extra tax will give The Treasury an unexpected £1.2 billion this year – which is £800 million more than forecast by Chancellor George Osborne in his Autumn Statement in 2014.
Although Osborne announced tax cuts on pensions by cancelling a 55% charge paid by many who did not spend their retirement savings, the huge influx in additional tax comes from the new pension freedoms.
Savers withdraw £1 billion
Now, pension savers can take 25% of the fund tax-free and pay income tax at their marginal rate on the rest of their pots.
Osborne has confirmed that more than 60,000 retirement savers have already taken at least £1 billion from their pensions under the new flexible access rules since April 6, 2015.
All this money comes from onshore pensions as many expat savers with Qualifying Recognised Overseas Pension Schemes (QROPS) have faced turmoil trying to find a provider offering flexible access.
Since the start of April, hundreds of QROPS are suspected to have closed to new business because they pay benefits to savers under 55 years old.
These include QROPS in popular expat destinations, such as Australia, New Zealand and Canada.
Figures are bonkers
Chris Noon, a partner at Hymans Robertson, argued forecasts from The Treasury were way out of line with what was happening in the market because the government wildly underestimated how the reforms would attract interest from pension savers.
“Their figures are bonkers,” he said. “The Treasury thought people would continue to buy annuities for income rather than take their cash, but given the returns are miserable and consumers do not like annuities, this assumption seems strange.
“We believe the Treasury knew the impact pension freedoms would have on the markets and held off making announcements so annuity and insurance firm share prices were not hit too much.
“Whatever the reason, they should not have underestimated the impact by so much because they knew consumers do not want to buy annuities.”