Tax raised from people making use of pension freedoms has exceeded initial Government estimates for 2015/16 and 2016/17 by £1.7bn.
According to Budget documents released yesterday, the Government initially estimated it would raise £300m in 2015/16 and £600m in 2016/17. However, £1.5bn was actually raised in 2015/16 and the latest estimate for 2016/17 is £1.1bn.
The document says initial estimates were subject to “considerable uncertainty”.
It says: “The original costing assumed individuals would spread their withdrawals over four years, but the latest HMRC information points to larger average withdrawals than we expected so we have shortened this assumption to three years.”
The Government is now expecting this year to be the “peak year” of yield rather than 2018/19.
The document adds: “HMRC data also suggests the average tax rate on withdrawals might be higher than originally expected. Some individuals are taking larger amounts than they would have been able to purchase through an annuity, thereby creating a higher tax liability.”
The Treasury document says pension freedoms are now expected to bring in £1.6bn in 2017/18 and around £900m each year for the remainder of the forecast.
Retirement Advantage pensions technical director Andrew Tully says: “This is a tax bonanza for the Treasury and although a welcome boost to Government coffers, will have been a nasty surprise for many people taking advantage of the new freedoms. Paying tax on withdrawals was seen at the time as a natural brake on withdrawing too much too soon but this clearly hasn’t been the case.”