The UK pension freedoms, which came into effect in 2015, could increase tax revenue by as much as £19.2bn ($25.2bn, €21.8bn) over the next decade, a report from the Pensions Policy Institute (PPI) has suggested.
The report, entitled How will the evolving retirement landscape impact tax and benefits?, predicted some individuals could end up paying 200 times more in tax, admittedly from a very low base, when they make a full withdrawal at state pension age compared to purchasing an annuity.
The PPI said the £19.2bn figure is based on the next 10 years of retirees accessing their pension pots in a similar pattern to that seen in the three years since the pension freedoms were launched, so the pattern and thus the amount could change significantly.
Drawdown reduces liability
The report noted that since the pension freedoms were introduced, only 13% of defined contribution (DC) pension pots accessed have been used to purchase an annuity. More than half (54%) have been fully withdrawn, nearly a third (30%) have entered drawdown and 3% have been accessed through UFPLS (uncrystallised fund pension lump sum).
It said that while past behaviour is not necessarily a predictor of future behaviour, it may give an indication of the range of impacts on tax revenue.
On aggregate, people currently aged between 50 and state pension age could pay between £4.6bn and £13.3bn more in tax if they choose to withdraw their pots fully at state pension age compared to if they annuitise.
If they all drew down steadily over retirement at a rate of 7% per year the impact would be significantly less, at between £100m and £900m. However, the PPI said that, based on the way in which people have so far accessed their savings since the pension freedoms were introduced, the impact is likely to be more in the region of £1.1bn to £3.3bn each year between 2018 and 2028.
Different access decisions
The modelling assumes that people will access their pension savings around state pension age, which accounts for the fact that some will access earlier and some later. However, changes in the age at which people access their savings would impact tax revenue trends.
It also stressed that those who have chosen not to access their savings yet, despite being able to, may make very different access decisions to those who have chosen to access their savings at a younger age.
It added that aggregate tax revenue increases over the 10-year period modelled, despite the fact that individual tax payments reduce over time because each year there will be people accessing their pension savings for the first time and incurring tax.
Some of these increases are due to the fact that people are increasingly reaching retirement with higher levels of DC savings. However, this means they may be offset by higher levels of tax relief received during the accumulation phase.
Lauren Wilkinson, policy researcher at the PPI, said: “There is considerable uncertainty around the impact that pension freedoms may have on tax and means-tested benefits in the future, both in terms of individual impact and what this might mean for state finances on an aggregate level.
“Based on the way in which people have so far accessed their savings since the pension freedoms were introduced, HMRC could see increased tax revenue of around £19.2bn over the next ten years.
“Some of these increases will result from the fact that people are increasingly reaching retirement with higher levels of DC savings, which means they may be offset by higher levels of tax relief received during the accumulation phase.”
