In the blizzard of numbers accompanying this year’s Spring Budget was the Treasury’s latest estimate of the additional tax revenue it has received since the introduction of pension freedoms in April 2015.
The headlines stated the new rules had increased the tax take by £1.5bn in 2015/16 compared with an original estimate of £0.3bn, and by £1.1bn in 2016/17 compared with an original estimate of £0.6bn.
So what do these figures tell us about the success or otherwise of the freedom and choice regime? To understand this, it is worth reflecting on where the extra tax actually comes from.
First, there would have been a set of people with middling pension pots that would previously have bought an annuity. Their pot was too large to cash out and too small for drawdown to be a viable option. In the past, these people would have drawn a regular taxable income for as long as they lived. Under the new rules, they can put their money into drawdown and withdraw as much or as little as they like.
If they draw money out faster than under an annuity, then this will bring forward tax revenue. If they take a large lump sum they could even find themselves moving into higher tax brackets. All to the advantage of the Treasury.
The second group that ends up paying more tax are those who would have gone into drawdown under the old rules and who would have been heavily constrained as to how much money they could withdraw.
With these rules having been substantially relaxed, this group are likely to take money out more quickly and, again, pay more tax as a result.
The trouble with estimates
Some have voiced concerns the much larger tax take from pension freedoms should worry us. Their argument is people must be taking out money “too quickly” and perhaps they will end up running out later in retirement.
In truth, though, we cannot draw such conclusions from headline figures like this.
First, the original Treasury estimates were just that: an estimate. The fact take-up of the freedoms has been greater than expected is far from being a sign of failure. It could well indicate the extent to which people have decided a different mix of capital and income in retirement is right for them, and how the changes have allowed them to order their own affairs in the way that works for them.
Second, the fact more tax was raised in 2015/16 than in 2016/17 shows how much pent-up demand there was when the reforms were introduced.
People had over a year to sit on their pension pots between when the new rules were announced in the 2014 Budget and when the starting gun was actually fired.
It should not really have come as a surprise to the Treasury that there would be a surge of activity in the first year.
Ultimately, what matters is whether the right people are exercising their pension freedoms. Where people are making choices based on expert advice or are turning small pots into useful cash lump sums, it is hard to see that as anything other than a good thing.
Steve Webb is director of policy at Royal London and a former pensions minister. Read more of his Money Marketing columns here.