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24 March 2017 last updated

Pension freedoms tax receipts exceed HMRC expectations at £1.5bn

Pensions freedoms has raised significantly more tax for the HMRC than the government had expected with £1.5bn in the 2015/16 tax year compared to the original estimate of only £300m.

According to figures published in the Spring Budget the government had initially estimated raising £300 million from the pension freedoms in 2015/16 and £600 million in 2016/17.

Due to the large number of people cashing-in their pensions the actual tax received is £1.5 billion in 2015/16 and £1,1 billion in the tax year 2016/17.

In the 2014 Budget the then Chancellor George Osborne introduced pension freedoms to allow people retiring to avoid buying a pension annuity and take their tax free lump sum with the remaining fund withdrawn from the pension and taxed at their marginal rate.

People also have the freedom to invest in flexi-access drawdown or a fixed term plan where their can access their pension either as an income, lump sum or both.

Pension freedoms tax receipts are £1.5bn
  Government tax receipts from pension freedoms is £1.5bn five times greater than expected
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Higher taxes from people retiring

Before pension freedoms in 2013 annuity sales were in the region of 90,000 per quarter and this figure decreased 75% to about 20,000 per quarter in 2015.

Most of the defined contribution (DC) pension funds taken as cash were small funds under £15,000.The higher revenue received was due to people taking larger amounts of money than they would have done with an annuity resulting in a higher amount of tax paid at their marginal rate.

The government said the original costing assumed individuals would spread their withdrawals over four years, but the latest HMRC information points to larger average withdrawals than they expected so they shortened this assumption to three years.

They have now brought forward the peak year of yield from 2018-19 to 2017-18.

HMRC data also suggest that the average tax rate on withdrawals might be higher than originally expected. Some individuals are taking larger amounts than they would have been able to purchase through an annuity, thereby creating a higher tax liability.

We now expect the measure to bring in £1.6 billion in 2017-18 and around £0.9 billion a year for the remainder of the forecast.

Reducing the tax people pay

The personal allowance for 2016/17 is £11,000 pa increasing to £11,500 pa for 2017/18 tax year. Most people would already receive some income at retirement from other pension schemes and State pension absorbing the allowance so taking a additional pension fund as a lump sum would mean paying basic rate tax.

To reduce tax at retirement you can consider other options such as flexi-access drawdown allowing you to take your tax free lump sum now and leave the remaining fund invested, take an income, a lump sum to minimise tax.

As an alternative, uncrystallised fund pension lump sum (UFPLS) would allow you to take your tax free cash as part of an income reducing the amount od tax paid. This approach can be an advantage as the fund remains invested over time allowing the amount of tax free cash in the future the opportunity to increase.

For a low risk investor you can consider a fixed term annuity allowing you to select an income and term for the plan. A five year plan would allow you to vary the income you take from nil up to the initial amount selected. Any income not taken accumulates in your account until it is needed without the deduction of tax.

A guaranteed maturity amount is available at the end of the term when you can consider all options again such as an annuity from any provider or flexi-access drawdown.

News related stories:
Pension fund withdrawals high with new legislation says FCA
Annuities sold now 75% lower than before pension freedoms
Pension freedoms have increased scams, says Committee of MPs
New pension rules see £1 billion of funds removed at retirement
Budget 2015 changes allow annuities to be sold by retired savers
Related internet links:
Money Marketing - Tax on pension freedoms increases by £2bn
Government - Spring Budget 2017 - policy costing
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