On the go: The Office for Budget Responsibility has revised its forecast of tax paid when people access their pension funds, expecting it to reach £1.7bn in 2021-22.
In its ‘Economic and fiscal outlook’ paper, the OBR said data from the first three quarters of 2021 to 2022 showed that withdrawals were once again on course to outstrip expectations and were up almost a fifth on the same period in 2020-21.
Its revised forecast of £1.7bn is up from £0.4bn in 2020-21 and is £0.5bn (39 per cent) higher than it expected in October.
Sir Steve Webb, partner at LCP, said: “Pension freedoms have the effect of bringing forward tax revenue for the Treasury. Instead of using a pension pot to buy an annuity where the taxable income can run for decades, people taking larger lumps early pay tax now, and often pay more tax overall.
“There are starting to be signs that people aged 55-plus are responding to the cost-of-living crisis by tapping into their pension pots, and the OBR clearly expects this to continue.”
This Budget 2014 measure, known as pension freedoms, gave individuals with defined contribution pensions the flexibility to withdraw their funds from age 55, subject to tax paid at their marginal rate, rather than the 55 per cent charge that was in place prior to that.
Jon Greer, head of retirement policy at Quilter, said: “Over-55s may now look to take advantage of pension freedoms to make ends meet in the absence of any help coming from the chancellor.
“The OBR has significantly increased its estimates of how much people will draw from their pension. It now expects receipts to be £1.7bn as people clamour to use their pension savings just to make ends meet during this cost-of-living crisis.”
The OBR said it also revised receipts from 2022-23 onwards by an average of £0.8bn a year, as it assumes people will make use of earlier withdrawals to manage the rise in the cost of living this year.
It said: “The recent strength is likely to be linked to a pandemic-driven increase in the number of over-50s bringing forward their retirement plans and facilitating that with earlier access to their pension pots. This has led us to revise up our forecast of tax paid on the flexible drawing down of pension funds significantly.”
This article originally appeared on FTAdviser.com
