Treasury may have under-estimated its tax windfall from pension freedoms by £350m

7th July 2015

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The Treasury may be in line for a windfall that is £350m higher than forecast as a result of the new pension freedoms, new analysis suggests.

Hargreaves Lansdown calculates that, based on the experience of the first two months of pension freedom, the Treasury’s original forecast of a £320 million boost to tax revenue is probably half the true total.

The adviser estimates that the Treasury’s tax take is likely to be nearer to £700 million higher this year as a result of the reforms.

In addition, the analysis suggests that because of short term issues, HMRC reporting of tax revenue data is unlikely to be an accurate reflection of the longer term picture.

Tom McPhail, head of pensions research at the firm, says: “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.”

 HMRC data distorted

HMRC data will be distorted in the early months for two reasons, according to McPhail. Firstly because many payments are taxed under an emergency tax code which results in an overpayment of tax. Pension investors can then subsequently reclaim the overpayment but it will take some weeks or months to sort out.

Secondly, the figures are lower because many pension investors are currently being thwarted from releasing cash by their provider’s inability to comply with their payment requests, he says.  As  companies work through the blockages, we should expect to see activity levels and tax revenues increase, McPhail says.

Other variables

As well as the pent up demand from last year, and the pension investors reaching retirement this year, Hargreaves Lansdown is also seeing some pension investors bringing forward transactions which would not otherwise have taken place for a number of years. Uncrystallised funds payments in particular are proving popular with those in their late 50s.

Final salary scheme transfers are currently proceeding slowly due to the advisory constraints on this market, says McPhail. In the Autumn statement the Treasury projected a £90 million tax boost thanks to defined benefits transfers. So far the market is only likely to have processed a small percentage of this potential demand, he estimates.

 

 

 

 

Other variables which will affect the outcomes

As well as the pent up demand from last year, and the pension investors reaching retirement this year, Hargreaves Lansdown is also seeing some pension investors bringing forward transactions which would not otherwise have taken place for a number of years. Uncrystallised funds payments in particular are proving popular with those in their late 50s.

Final salary scheme transfers are currently proceeding slowly due to the advisory constraints on this market, says McPhail. In the Autumn statement the Treasury projected a £90 million tax boost thanks to defined benefits transfers. So far the market is only likely to have processed a small percentage of this potential demand, he estimates.

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