The Treasury’s tax take is likely to be nearer to £700m higher this year as a result of the pension freedom reforms, more than double the £320m extra originally forecast, according to figures from Hargreaves Lansdown.
Hargreaves calculates that the retiree market consists of 400,000 people, with an average pot of around £30,000, making a total of around £12bn a year maturing from pensions pre-pension freedom reforms. It assumes 20 per cent taxation on this £12 billion, which would be paying an income of around 6 per cent, giving a pre-freedoms tax yield of £144 million. This calculation assumes income paid at 40 per cent is broadly offset by that which is not taxed at all.
The median pension pot at retirement is around £20,000 and research shows us that following pension freedom, the majority of these are just going to leave as cash. This is broadly consistent with the initial data we are seeing which shows average cash-in values of around £12,000 to £16,500.
Hargreaves figures show 200,000 people with pots of £20,000 or less, the majority of whom are just going to take the cash. If this group takes on average £15,000 and pays 15 per cent tax, the tax take is £450m. It then identifies a further 25,000 people who are withdrawing an average of £40,000 on which they pay 20 per cent tax, generating an additional £200m. It also adds in the further group of individuals who carried over from last year, when market activity dropped from around 400,000 investors a year to less than 250,000 between March 2014 and April 2015. Hargreaves assumes there are 50,000 of these and they are now going to access their pensions, taking an average of £15,000 and paying 15 per cent tax, generating a further £112m in tax.
For drawdown investors Hargreaves estimates 100,000 people investing in drawdown, with an average investment of £75,000, draw a 4 per cent income, taxed at 20 per cent, generating a further £60m in tax.
It predicts 75,000 people will buy an annuity this year, with an average pot size of £35,000. Assuming a 6 per cent yield, and 20 per cent tax on all the income, this would generate £31.5m in tax.
The original March 2014 Treasury forecast was for an additional £320m in tax revenues. This was boosted in the Autumn statement by a further £60 million, thanks largely to an expected surge in defined benefit transfers.
The firm says early HMRC reporting of tax revenue data is unlikely to be an accurate reflection of the longer term picture because pension savers are being thwarted in their efforts to withdraw cash by providers’ inability to comply with payment requests, suppressing withdrawal rates. The picture is made more complex by the fact that many payments are taxed under an emergency tax code which results in an overpayment of tax that may not be recovered for several months. Other variables include those in their late 50s making uncrystallised funds withdrawals and final salary transfers. In the Autumn statement the Treasury projected a £90m tax boost from defined benefits transfers but the market is only likely to have processed a small percentage of this potential demand, says Hargreaves.
Hargreaves Lansdown head of research Tom McPhail says: “We now have a total market for the year of 450,000 people paying a total of £853 million in tax, this is an increase of around £700 million compared to the baseline.
“It looks as if the Chancellor could be in for a handy windfall, thanks to his pension reforms. It is important to bear in mind though that this will simply bring forward tax revenues and consumer spending which would otherwise have been paid out over the years and decades to come. It also underlines the importance of maintaining a stable pension system which continues to encourage and reward responsible long-term savings habits.”