The Government is set to receive £1.2bn in tax receipts as a result of the pension freedoms, £880m more than it projected in the 2014 Budget.
Pensions consultancy Hymans Robertson estimates that at least £6bn will have been taken out of pensions by the end of the first year of the new freedoms.
This translates to £1.2bn in extra tax for the Exchequer, far higher than the £320m originally earmarked and the 2014 Autumn Statement upward revision of £415m.
Hymans says it expects the pace of withdrawals to increase as providers “respond to Government pressure” and administrative processes are streamlined. It adds growing interest in defined benefit transfers will boost withdrawals further.
The Conservative manifesto also outlined proposals for limiting high earners’ tax relief on pension contributions. In addition, the lifetime allowance is due to drop to £1m from April 2016. Hymans says the impact of this, combined with extra revenue resulting from the freedoms, will boost Treasury coffers by around £3bn.
Hymans Robertson partner Chris Noon says: “Now that we have freedom and choice in pensions, the usual £10bn to £15bn of ‘retiring’ money will be taken out faster than it previously was due to the relative unpopularity of annuities. In other words, the money is less likely to be invested in an income stream for life. Instead the withdrawals are likely to be ‘front loaded’.
“Second, there is around £100bn of available money in the pension pots of the over 55s. We have assumed that 5 per cent of these funds (around £90bn) are withdrawn over the year (around £4.5bn). Previously these individuals would not have drawn on any of this money until they chose to ‘retire’.”
He adds: “Finally, we expect to see some individuals with DB pensions converting some or all of this benefit to a DC fund. They will then typically draw this money much faster than the DB benefit would have been paid. We’ve already seen an increase of 50 per cent in requests for transfer since 6 April.”