HMRC are expecting to benefit from the pension freedom laws, as people prefer to cash in than purchase more tax efficient retirement income vehicles

Pension freedoms could generate tax revenue of around £19.2bn over the next decade, according to research from the Pensions Policy Institute (PPI).

In its research briefing note called ‘How will the evolving retirement landscape impact tax and benefits?’, the PPI has suggested HMRC had seen an increased tax revenue of at least £1bn a year . The research showed just 21% of pension pots worth between £50,000 and £99,000 which had been accessed since the introduction of pension freedoms in April 2015 had been annuitised.

The pension freedom laws are just 3 years old, and now we are beginning to see the impact of being able to easily access cash from pension pots. Based on the way people have accessed their savings since pension freedoms were introduced, HMRC predicts they will see an increase in tax revenue of around £19.2bn over the next 10 years.

The reason for this increased tax income, is due to the way pension pots are now being accessed. Instead of more efficient long term investment vehicles such as annuities, many prefer to take cash lump sums and pay the relevant tax on withdrawal. Whilst this gives an immediate access to funds, it is normally not tax efficient, and results in a higher tax bill compared to other retirement income solutions.

The research suggested tax payments will continue to increase because more people have been withdrawing from their pensions since the pension freedoms were introduced. The Work and Pensions select committee has called for capped drawdown fees but the Financial Conduct Authority’s chief executive Andrew Bailey said he was not convinced it was the right thing to do.

The report also noted that since the pension freedoms were introduced, only 13% of defined contribution (DC) pension pots accessed have been used to purchase an annuity. More than half (54%) have been fully withdrawn, nearly a third (30%) have entered drawdown and 3% have been accessed through UFPLS (uncrystallised fund pension lump sum).

It said that while past behaviour is not necessarily a predictor of future behaviour, it may give an indication of the range of impacts on tax revenue.

On aggregate, people currently aged between 50 and state pension age could pay between £4.6bn and £13.3bn more in tax if they choose to withdraw their pots fully at state pension age compared to if they annuitise.

If they all drew down steadily over retirement at a rate of 7% per year the impact would be significantly less, at between £100m and £900m. However, the PPI said that, based on the way in which people have so far accessed their savings since the pension freedoms were introduced, the impact is likely to be more in the region of £1.1bn to £3.3bn each year between 2018 and 2028.

The new flexible pension reforms have been particularly popular for overseas expatriates. Previously it was required to purchase an offshore pension such as a QROPS to access pension savings as cash. Indeed the pension reforms were partly driven to combat the large sums of cash flowing out of the UK, into overseas pension schemes.

Since pension flexibility has been introduced, the sale of overseas pension schemes has dropped dramatically. Now expats can access their UK pension pot cash much more easily. However, depending on residency status, there may still be UK tax to pay on withdrawal.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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