• Pension freedoms could generate an additional £1bn * in income tax in their first year
• Reduced lifetime allowance has already boosted pension tax take by £100m
• Reforming pension tax reliefs could represent yet another tax grab on pension savers
Aegon is highlighting the windfall the Chancellor is already receiving from the pension freedoms he announced in his Budget two years ago and which went live last April. Under the freedoms, individuals can now take as much as they like out of their defined contribution pension pots from as early as age 55. But after the first 25% which is currently tax free, the rest is taxed at the individuals ‘marginal’ income tax rate which can be up to 45%.
Aegon’s intervention comes after a Freedom of Information request reveals that another of the Chancellor’s pension tax changes, which has chipped away at the total amount which can be held tax free in a pension has generated almost £100m ** in additional tax revenues.
Steven Cameron, Regulatory Strategy Director at Aegon says: “The Chancellor’s pension freedoms have been widely welcomed as offering pension savers unfettered access to their retirement savings from as early as age 55. However, many of those who have taken advantage of them will also have done their bit to help close the Chancellor’s Budget deficit. After the first 25% which can be taken tax free, individuals pay income tax on any further pension withdrawals. So those who’ve taken income earlier than they might have done have also paid tax sooner than they would otherwise have – creating a tax windfall for the Chancellor.
“Furthermore, those taking larger lump sums could find that this moves them into a higher income tax band. If they had taken income as a regular stream, they might have paid 20% tax. But by taking it as a large lump sum, they’ll pay 40% or even 45% on part of it. So not only are they paying tax sooner, they are also paying more overall, creating a further windfall.
“The pension freedoms are good news for many pension savers – but they are also good news for the Chancellor’s tax take. Any moves in the forthcoming Budget to further reduce tax relief on future pension contributions would represent a second tax grab on pension savers.”
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