Tax changes to Pension mean Windfall for the Treasury
New changes from pension systems which allow Brits to cash in their savings may end up providing an extra tax windfall when it comes to the Treasury.
Since April this year, those over 55 have been able to choose to take their pension in cash, instead of buying an annuity in order to provide income for retirement.
By taking their pension savings all at once, this could lead to a much more significant income tax bill.
Income tax revenue is predicted to be more than double the amount expected by the Treasury this year, as it originally forecast £320 million would be arriving in its coffers during 2015-16. However tax is actually likely to be well over £700 million throughout the year, as suggested by Hargreaves Lansdown.
The changes mean that those over 55 can withdraw any amount they like from their Defined Contribution scheme, although it is still subject to income tax. These tax changes will make it easier to pass the pension savings onto children and grandchildren. Many people who currently have Defined Benefits (DB) schemes will also be allowed to change to DC plans.
Retirees will also have access to some free guidance from Pension Wise, a government service. However existing annuity holders are currently unaffected.
Some pensioners have been using cash from their pension to pay for cars and holidays. The resulting revenue from the tax which is now brought forward from future years will be welcomed by the Chancellor George Osbourne as he strives to make the savings he outlined in the budget on Wednesday.
It’s important to remember that this will simply be bringing forward spending and tax revenues which would have otherwise been paid out over future years and decades.