Government raises £1.7bn more than predicted in tax receipts from pension freedoms
08 Mar 2017
- The increased tax take could be at the expense of people having enough to take them through retirement
- Trustees have a moral duty to support scheme members with complex choices at retirement
Commenting on the increased tax receipts, Chris Noon, Head of workplace savings, said:
“There are several reasons why the Government has collected more tax from freedom and choice than it originally estimated.
“First, average withdrawals have been larger than anticipated. The Government assumed individuals would spread withdrawals over 4 years, which they haven’t. This shows that individuals have been making suboptimal choices due to a lack of understanding of the tax consequences of their decisions. They’ve been stung with hefty tax bills as a result.
“Second, many people with Defined Benefit (DB) pensions will have converted some or all of this benefit to a Defined Contribution (DC) fund. They will then typically draw this money much faster than the DB benefit would have been paid.
“Some of the increase in tax revenue to the Government will come at the expense of individuals’ pensions pots. This underscores the need for better support around the decisions people now have to make.
“The message could not be clearer: we need to be better at helping consumers exercise their freedoms in an informed way. There is a real danger that the many people who have withdrawn funds without help from an adviser will discover that they have been taking out too much, being hit by huge tax bills which then depletes their remaining pension pot.
“On the DB side, the numbers cashing out of DB pensions have soared since freedom and choice. Twice as many people transferred in the first year and momentum is increasing. Whether they stay or leave, there are huge risks members could make poor decisions with a life-changing and life-long impact.
“Pension scheme trustees have a moral duty to protect members. Ensuring people make the right choices when making one of the biggest financial decisions of their life is a natural extension of trustee duties and there is much that they can do. Members staying or transferring out of DB must do so on an informed basis and with access to quality advice. For example, putting in place a preferred advisor for a scheme can bring dramatic cost savings. Retail customers pay £5,000 plus for DB transfer advice, yet the average cost for a scheme-appointed adviser is more like £1,000.
“If scheme members are unsupported and make the wrong choices this could come back to bite trustees and employers, particularly as evidence supports that most expect support with the complex 'at retirement' decisions. Schemes need to give their members the right information at the right time to make decisions that are in their best interests. If they don’t get this right, they run the risk of members ultimately holding them responsible for not providing the support they need and expect.”