New pension rules will generate a huge tax boost for government coffers, according to HM Revenue & Customs (HMRC).
HMRC expects to gather £1.2 billion of income tax from retirement savers in the 2018-19 tax year – compared with around £320 million projected for 2015-16.
The money will come from tax on easy-access drawdown of pension funds under new rules taking effect from April 2015.
HMRC also reckons that the number of retirement savers drawing down cash under the new rules will entice up to 130,000 people to take their pension funds as cash, compared with around 5,000 taking flexible access now.
The figures are part of a four week consultation inviting industry experts and retirement savers to put forward their comments about the new rules.
Tax changes in detail
The results of the consultation will form part of a new Taxation of Pensions Bill to go before Parliament in the autumn.
The proposed new rules include:
- Removing the 55% tax charge on retirement savers who draw down their pensions as cash
- Removing the maximum limits on withdrawals
- Removing the minimum income requirement for drawing a pension fund as cash – which currently only allows retirement savers who have other income in retirement of £12,000 or more
- Letting capped drawdown retirement savers switch to the new easy-access arrangements
- Allowing pension firms to pay 25% of a fund tax-free in instalments rather than as a single 25% lump sum
- Allowing pension funds to ignore existing flexible drawdown contracts in favour of the new rules
- Removing rules insisting retirement savers buy lifetime annuities
- Imposing a lower annual contribution allowance to stop retirement savers from recycling their pensions to gain extra pension contribution relief. A cap of £10,000 a year is the suggested level, compared to £40,000 for other retirement savers
“The consultation is aimed at letting taxpayers know what the new changes are likely to be so they can make financial plans for their retirement,” said an HMRC spokesman.
HMRC figures disputed
The consultation details the proposed changes with guidance notes alongside with an impact assessment on the consequences for retirement savers.
The consultation ends on September 3, 2014.
AXA Wealth head of retirement planning Andy Zanelli disputes the HMRC projection of 130,000 taking their pension cash each year.
“Our research suggests only 7% of pension savers will take advantage of the new rules and take their pension cash to spend how they like,” he said.
“Income tax is the big problem. Drawing £50,000 in one lump is likely to push someone into paying tax at 40% or more, so phasing the drawdown over more than one tax year could save tax.”
