The Treasury will raise £1.6bn of tax in 2017-2018 from pension transactions associated with the pensions freedom reforms of two years ago – almost twice as much as it had previously forecast. But the figures have again raised concerns that some savers may be cashing in too much of their pension funds too early in retirement.
When the reforms were announced, the Treasury estimated that savers cashing in pension funds rather than buying an annuity would generate £910m of additional income tax in the 2017-2018 tax year, because people would be able to take out much more cash by exercising this new right. Ministers had expected savers to be prudent about withdrawals, in order to avoid an unnecessarily large upfront tax bill and to ensure their savings last in retirement.
However, the latest figures suggest some people may have been less cautious than predicted – although it’s difficult to assess the extent of this, as there is no single source of data on an individual’s aggregate pension savings. Someone cashing in all of a pension fund built up through their employer, for example, may have several other private pensions to fall back on, or may have no additional savings at all.
Still, one possible incentive for higher pension withdrawals has now been curtailed. The chancellor confirmed last week that the money-purchase annual allowance – the amount someone may invest each year in a pension once they’ve started drawing down benefits – will fall from £10,000 to £4,000 from 6 April. The Treasury suspects some people have been withdrawing sums from their pensions purely to pay the money back in and gain a second set of tax reliefs.