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Treasury windfall of £1.6bn as 200,000 plan to cash in pensions

Research suggests around 200,000 savers plan to cash in their defined contribution pension pot next year, creating a potential tax windfall for the Treasury of up to £1.6bn.

The poll of 1,247 UK adults, carried out by Ipsos Mori on behalf of Hargreaves Lansdown, found that 12 per cent of DC savers plan to take advantage of the Budget freedoms available from April.

Of those who plan to take the cash, only 38 per cent of people knew how much tax would be paid on medium-sized pension pots, while just 6 per cent could say how much a large pot would lose to tax.

Hargreaves Lansdown says based on the results there could be as many as 200,000 people choosing to cash in their savings next year. It estimates the Government’s tax take on this would be between £800m and £1.6bn.

The Government’s own estimate puts the extra tax income in 2015/16 at only £320m, rising to £600m in 2016/17.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Whilst we support the basic principles behind the Government’s reforms, the speed and complexity of these changes mean that a lot of investors are going to paying unnecessarily large amounts of tax to the Government. The Chancellor has effectively engineered a tax windfall for the Government from unsuspecting pension investors.

“There is an urgent need for the Government to think again about how to effectively regulate these new freedoms. We want investors to take responsibility for and to engage with their savings but we also don’t want then paying unnecessary tax bills or running out of money.”

The survey also found only 22 per cent planned to use their pension to live on. Some 21 per cent would have a holiday, 16 per cent would reinvest in property and 13 per cent planned to pay off debts.

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. Just call me a sceptic – but was this not what it was all about i the first place – a massive tax injection for the government of today, and a massive headache for the governments of tomorrow!

  2. Peter Maxwell-Lyte 28th October 2014 at 9:29 am

    Help to sort out the EU Bill!

  3. It’s just about the right amount to pay that EU bill as well!

    Funny that!

  4. Shouldn’t we factor in the compensation payments for when all these liberated pensions are put into investments that go bust due to the incompetence of the FCA regulator?

  5. Bethell Codrington 28th October 2014 at 9:41 am

    Lee, you are not a sceptic. It is politicians playing politics with peoples futures, peddling myths about annuities etc. Hopefully win a few votes, increase the tax take, stimulate consumer spernding in the short term and worry about the mess that will materialise later, when the Politicians have all retired on their generous final salary pension schemes, funded by gues who? Oh yes, us poor tax payers.
    We all know it was a knee jerk announcement by the amount of gaping looppholes they are now trying to close. Poorly thought out and poorly executed.

  6. Money Guidance CIC 28th October 2014 at 9:43 am

    Almost enough to pay Mr Juncker in 5 weeks` time.

  7. There will be no windfall as research suggests that nearly 30% of the 600,000 a year new pensioners will aim to put to put their lump sums in BTL property which will mean they will also need BTL mortgages in most cases. The current subsidy on BTL mortgage interest is £13.8 billion (2012) and this will more than offset £800,000 to £1.6 bn the Treasury expect to take in additional taxation. It is no wonder the current tax take is less than the Chancellor forecast!

    All the new pensions proposal are going to do is keep house prices spiralling out of reach of first time buyers and create a much greater division in our society. The sooner the Treasury starts to reduce the BTL subsidy on mortgage interest against rental income the sooner house prices will become affordable again for our younger generation. It is obvious we need to build more affordable housing but it has not been achieved since the days of Harold Macmillan. The opposition politicians both Labour & Liberal have missed the point on the Mansion/Property Taxes it needs to reduce the subsidy to landlords. This will also immediately halt immigration as property would be bought by British FTBs rather than landlords who let them as houses of multiple occupation.

    Cutting the subsidy on BTL mortgages is a win, win situation for the whole country except the 2 million landlords who would need to sell up and invest in other parts of the UK economy.

  8. Ken Clarke did it Gordon Brown did it and now George Osborne
    But it’s all our fault for over charging,and the vast amount of commission we were paid, which caused the failure of the pensions industry in this country and not successive incompetent government.

  9. Perhaps I’m being thick but I don’t understand how 12% of 1,247 people polled (that’s only 150) scales up to an estimated 200,000 likely to take their entire pension pots as a lump sum. Also, how many of those polled have pension pots that fall within the present triviality limits anyway?

    All these concerns appear to stem from the removal of the shackle of annuity rates without putting in its place a better alternative such as an Income DrawDown limit of 7.5% p.a. Few people could reasonably complain about that and it would avoid foolish and impetuous actions such as 100% encashment.

    Also, if HMRC goes ahead with its proposal to apply an emergency tax rate of 45% to such funds, surely this will be a major deterrent?

    As for advisers faced with clients intent upon ignoring all advice that their best course of action is likely to be to apply their funds in a sustainable manner, most, I imagine, will make very clear that they accept no responsibility for the consequences of such action. Except for trivial funds, many advisers may well state categorically that, knowing that it’s very probably the wrong thing to do, they are not prepared to act merely as facilitators for complete commutation.

  10. A cynical vote winner on 3 counts: 1. siding with the large proportion of baby-boomers who “don’t believe in pensions” or “wish I’d never started a pension in the first place”, by saying “hey, we agree, but it’s ok, you don’t have to buy one of those horrible annuity things anymore, you can just have the lot”; 2. massive and immediate tax grab by allowing (encouraging?) a huge number of people to take a lifetime’s worth of income upfront; and 3. the consequent positive effect on the economy will be far from insignificant. I think that even this survey underestimates the number of people that will take lump sums rather than income. I am also sure that affordable advice for small and medium pots will become increasingly unavailable as advisers realise the huge potential risk and the heightened costs of advising in this area. I used to specialise in at-retirement advice, but I’ve reluctantly taken the decision to get out now. I might re-enter the market when the dust settles, but I suspect that may not happen for some considerable time.

  11. Today’s news: McCafferty at the BoE says interest rates should rise now.
    So buy an annuity and:

    1. Thwart the Government
    2. Ensure an income for the rest of your life with no risk – except inflation – which the interest rate rise is supposed to control.
    3. Solve part of your IHT problem.

    All at a stroke!

  12. Assuming that Hargreaves Lansdown were polling their own clients – and I don’t know how else they’d do it – you would expect there to be a bias towards those who plan to cash them in.

    If you polled 1,000 or so clients of IFAs I expect the results would be very different… but not as conducive to a good headline.

  13. And the next question in the survey was “If you cash in all your pension fund and had to pay 40% tax on part of it, would you still go ahead?”
    Lies, Damned lies, statistics and now add surveys.

  14. As all have said it’s an insignificant survey to determine what the majority will do when the time comes ! As advisers we have a damned if we don’t and damned if we do scenario . Those with long memories will confirm that pensions have been messed with constantly since the eighties , with an election due we have no idea if these proposals will exist in this format in 12 months time . i had clients who missed the age 50 retirement change by months and with the possibility of tax releif and tax free cash going maybe we are pushed into advising using the new options for those over 55 in a use it or lose it type scenario . Where does that leave us in the advice process ! Simples it ain’t !!

  15. Since the middle of August I have had 40 interviews with clients specifically to speak about transferring into SIPP’s. From a broad range of DB and DC schemes.
    Precisely ONE wants an immediate lump sum out, but even that is going to be under 25% of the fund. None of the others, although most are potentially able to, are looking to take out anything yet. They are all much more interested in growing their pension pots because they recognise the need to make as much provision for retirement as possible.
    So what questions were asked by the survey?

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