When Pension Freedom was first announced by George Osborne, in the spring of 2014, many commentators remarked that giving people greater access to their pensions, whilst raising additional revenue for the Treasury, was a clever move.
New figures have now revealed the likely extent of the windfall to the Treasury and it’s far greater than had previously been predicted.
George Osborne had indicated that in the first year Pension Freedom would raise £415 million. However, new figures from Hymans Robertson, a pension consultancy, estimate that a total of £1.2 billion will be paid in tax, as people take at least £6 billion from their pensions under the new rules.
The pace of withdrawals is also expected to increase, as pension providers become quicker at responding to requests to withdraw money and more people decide to transfer from Final Salary and Defined Benefit schemes.
Hymans Robertson partner Chris Noon said: “We expect to see some individuals with DB pensions converting some or all of this benefit to a DC fund. They will then typically draw this money much faster than the DB benefit would have been paid. We’ve already seen an increase of 50 per cent in requests for transfer since 6 April.”
The unexpected windfall for the Treasury emphasises the importance of careful planning when taking money from your pension to ensure the tax you pay is kept to a minimum.
Under the new rules the first 25% withdrawn from a pension is tax-free. The balance is then added to your income in the tax-year you are making the withdrawal and taxed accordingly.
However, many people are under the impression that if they currently pay 0% or 20% tax, this is the rate they will pay on money they take from their pension. This isn’t necessarily the case and if the lump sum withdrawn is large enough, it could push you into a higher tax band, leaving you with a smaller lump sum than you had planned for.
There are ways of reducing the tax paid when you withdraw money from your pension, for example by staggering over two or more tax years. However, this takes careful planning and advice is often invaluable.