Does the Treasury's pension freedom tax windfall mean people are plundering their retirement pots? Either way, warns Tom Selby, without proper data, everyone is left analysing the social impact of the reforms blindfolded
When George Osborne talked about freeing retirees from the deathly grip of annuities in his 2014 Budget speech, it was clear the former Chancellor had two prime objectives.
The first was shaking the branches of a lumbering insurance market that had for too long milked savers by shovelling them into guaranteed retirement income products. The weakness of the supply side meant the profit margins on annuity business were sky-high and, importantly, dividend-hungry shareholders needed feeding. The approach was relatively simple - pile ‘em high, sell ‘em expensive.
The second, arguably more pressing, motivator was money. With growth still anaemic, Osborne needed something to bolster the Treasury coffers - and if it could win popular support, all the better.
By handing savers total flexibility over how they spend their retirement pot, the Treasury knew some would take a higher income than if they had bought an annuity - pushing them into a higher tax bracket in the process. Equally, others who were not planning on taking their pension pot at all might decide to take some or all of it in one go, again boosting tax take.
The government expected the freedoms to raise tax revenues by around £300m in 2015/16 and £600m in 2016/17. A note hidden on page 221 of the Office for Budget Responsibility's Economic and Fiscal Outlook (2017), however, reveals the reforms have raised far more than expected.
In fact, Treasury coffers were increased £1.5bn in 2015/16 by the freedoms - five times the original estimate - while the latest figure for 2016/17 is £1.1bn.
The Office for Budgetary Responsibility (OBR) 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.
It adds: "HMRC data also suggest 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 OBR says it now expects the measure to bring in £1.6bn in 2017/18 and £900m thereafter.
So what do we make of all this? Is this evidence savers are wildly withdrawing huge sums, boosting Treasury tax revenues today but placing a greater burden on the welfare system in the future?
To my mind, the latest figures tell us only two things. First, the government is abysmal at predicting human behaviour - although this was doubtless not helped by the fact the reforms were such a closely guarded secret prior to the 2014 Budget.
Second, we need much better information on pension withdrawal patterns. That is because it is not the volume or size of withdrawals that really matters - it is the sustainability. So far, none of the data produced by either the government or the Financial Conduct Authority tells us anything about this.
Are most people plundering their entire retirement pot? Or do those making significant withdrawals have other sources of income - perhaps from defined benefit pensions or defined contribution pots held elsewhere?
If the government is not assessing this information already, perhaps the OBR's intervention will act as a kick up the backside. Because without it we are analysing the social impact of the reforms blindfolded.
Tom Selby is a senior analyst at AJ Bell
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