Pension freedoms: Government gets major tax boost from new rules
Pension freedoms have proved to be popular with retirees, but there are definitely perks for the taxman too...
New HMRC figures show that the pension freedoms introduced in April 2015 are proving to be a huge success – especially for the Government.
Hundreds of thousands of people have used the new rules to access the money in their pension pots with £9.2 billion being withdrawn.
This huge outflow is also great news for the taxman, with tax revenues believed to be 50% higher than originally estimated, according to Fidelity International.
“The statistics released by HMRC show that pension freedom continues to generate significant revenues for the Government,” says Richard Parkin, head of pensions policy at Fidelity International.
“So far in this tax year, we have seen £500 million more of payments made than in the whole of the last tax year, which was also ahead of expectations.
“If the current rate of payments is maintained we’ll be looking at an increase of nearly 50% in the value of payments made to a whopping £6.4 billion with a corresponding boost to tax revenues.”
HMRC’s stats show that 1.5 million payments have been made under the pension freedoms.
A total of 162,000 people have accessed £1.56 billion in the last three months alone.
“Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do,” says Simon Kirby, Economic Secretary to the Treasury.
“These figures show that people continue to take advantage of the choices on offer.”
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How much has the Government raked in?
While HMRC do release figures for how much is being taken from pensions, it doesn’t reveal the details of the tax rates, so it is difficult to estimate just how much the taxman is getting.
However, last year’s pension payments were believed to have generated £200 million more than the original £320 million estimate, meaning a total take of around £520 million.
Parkin believes that if similar tax rates are paid this year HMRC could receive around £900 million in additional tax revenue.
“Pension freedom is hugely popular with consumers but is clearly benefitting Government too,’ says Parkin.
“By any measure it looks like the revenue is set for an even bigger tax benefit from pension freedom than they’d originally expected – perhaps as much as 50 per cent higher.”
So, are pension freedoms just a sneaky way for the Government to boost its tax revenues?
Well, yes and no. Right now, HMRC is enjoying a healthy increase in the money flowing in but that represents tax it would have got eventually. It is just getting it early.
“For the most part, pension freedom is just bringing forward tax receipts from the future to today,” says Parkin.
“The more flexible payments that are taken today, the less will be taken in the future so reducing future tax revenues.
“In the long run this policy will likely have a negative impact on Government finances but in the meantime it’s delivering a welcome boost.”
How to minimise your pension tax bill
An effective way of reducing your pension tax bill is to gradually withdraw your pot in smaller amounts.
You don’t have to tell HMRC you’re doing this, but your pension company will have to tell you that you've withdrawn income flexibly within 31 days of taking money out.
As you probably know by now, the first 25% of the amount you withdraw is tax-free, while the rest is taxed as income.
This doesn’t include your Personal Allowance of £11,000 a year. Of course you should be wary of taking out too much cash at once as this will bump you into a higher tax band.
Just be warned that you may pay emergency tax on your withdrawal but you can reclaim this from HMRC or wait until the end of the tax year when you'll be repaid automatically.
For more advice, visit the Pensionwise website or have a chat with the Pensions Advisory Service on 0300 123 1047.
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State Pension tax break worth thousands: are you missing out?
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