Following HM Treasury’s announcement that it will pocket circa £5 billion in additional tax over the next year purely as a result of the pension freedoms policy of 2015, Partner and Actuary at Cardiff-based Quantum Advisory, Stuart Price, looks into the possible repercussions.
“The huge sum vastly exceeds predictions with more pensioners taking advantage of the freedoms than anticipated – but there could be trouble on the horizon.
“The ‘new’ freedoms allowed anyone aged 55 and over to access their defined contribution pension pots by taking it either as a one off or series of lump sums, paying no tax on the first 25% and the rest taxed as if it were a salary at their income tax rate.
“Great news for the Treasury as the uptake in withdrawals is generating income through the additional tax now rather than spread over the lifetime of the pensioner. Not such good news for the pensioners, who in many cases actually pay more tax as their lump sum(s) may partly be taxed at a higher rate, which would not have been the case otherwise. There is also of course the risk that these individuals do not have significant savings elsewhere, and their money may start to run out as they get older.
“I think the main issue here, is many people are accessing their pension pots without taking professional advice. Currently, advice is only required if people are transferring a defined benefit entitlement to a defined contribution arrangement (to access the freedoms) and the transfer is more than £30,000. In my opinion, there should be a requirement to take professional advice to access the freedoms above a certain income level to avoid individuals running out of money as they get older. Perhaps not the news the Treasury wants to hear in the short-term, but overall it will be in everyone’s best interests, otherwise there could be an increase on those reliant on the State to prop up their income in retirement and who will foot the bill for that – the Treasury!”
Stuart Price is Partner and Actuary at Quantum Advisory. Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members from offices in Cardiff, Bristol, Amersham, Birmingham and London.