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Government nets £2.6bn from rush to cash in pensions

Budget reveals government set to net three times more tax than first thought from pension freedoms, alongside crackdown on overseas pension schemes.

 
Government nets £2.6bn from rush to cash in pensions

The government is set to net £2.6 billion in income tax revenues as a result of pension freedom reforms, nearly three times as much as previously thought, as retirees rush to cash in their savings.

These rules abolished compulsory annuities, allowing those over the age of 55 to spend or invest their pension pot as they wish. Before they were introduced, the Treasury predicted the changes would result in £300 million in extra income tax in 2015-16, followed by £600 million during this tax year.

However, retirees have taken larger amounts out of their pensions than was previously forecast: actual tax receipts totalled £1.5 billion in 2015-16 and are estimated at £1.1 billion during this tax year. While this provides the government with an unexpected windfall, some commentators said the jury was out over whether this represented a positive trend for retirees.

Former pensions minister Ros Altmann said: ‘One cannot draw many conclusions from this as we do not know what the people who withdrew money will be doing with it - whether they have other pensions elsewhere and are repaying debts and so on. The government needs to conduct some proper research into what people are doing when withdrawing pension money.’

Looking ahead, revenues from the pension freedoms are expected to grow to £1.6 billion in 2017-18, falling to £900 million a year later.

Allowance cut draws criticism

Chancellor Philip Hammond meanwhile drew criticism with his Budget plan to proceed with a cut to the ‘money purchase annual allowance’ (MPAA) from £10,000 to £4,000 per year this April. This means that once savers start withdrawing funds from their pension, they will only be able to contribute a maximum of £4,000 a year to their pot.

Jon Greer, pensions expert at Old Mutual Wealth, said the MPAA cut was at odds with the spirit of pension freedoms.

‘By reducing the MPAA to £4,000 the government may be inadvertently penalising individuals that want to continue funding pension contributions in their late fifties and beyond after they have flexibly accessed some money purchase income,’ he said.

Richard Parkin, head of pensions policy at Fidelity International, added: ‘This constant moving of goal posts on pension rules only serves to undermine people’s confidence in pensions. Our customers tell us that one of the main reasons for not saving more for retirement is they don’t trust that the rules won’t change again.’

Overseas pensions

Elsewhere in the Spring Budget, the government has sought to clamp down on people who aim to pay less tax by moving their pension to another jurisdiction.

A new 25% charge on transfers to foreign pension schemes, known as Qrops, will be introduced from 9 March 2017. Exceptions will apply to the charge where people have a genuine need to transfer their pension. These include if the individual and the Qrops are in the same country after the transfer, the Qrops is in a country in the European Economic Area or if the Qrops is an occupational pension sponsored by the individual’s employer.

The government said these changes were being introduced to create ‘fairness in the tax system’, as overseas pension transfers already enjoy tax relief in the UK.

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1 comment so far. Why not have your say?

Law Man

Mar 11, 2017 at 10:57

Freedom of draw down: this has been of great benefit to us. Regrettably a small minority will act foolishly, although this can be mitigated by (1) vigorous prosecution of criminals who encourage investors to transfer to unsuitable schemes, and (2) making it clear that wastrels will not be entitled to state benefits.

Overseas pensioners: if HMG (rightly) clamps down on artificial tax saving schemes, in return they can offer genuine foreign based state pensioners the same rights as domestic state pensioners. They have paid the same tax and NIC.

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