Pensions freedom and choice could result in a tax revenue increase of £19bn over the next 10 years, according to the latest research from the Pensions Policy Institute (PPI).

Its report, How will the evolving retirement landscape impact tax and benefits?, found that HMRC could be in line for an increase in tax revenue received through pension withdrawals due to the way individuals have been accessing their savings.

PPI policy researcher, Lauren Wilkinson commented: “There is considerable uncertainty around the impact that pension freedoms may have on tax and means-tested benefits in the future, both in terms of individual impact and what this might mean for state finances on an aggregate level.”

The survey found that the average person with £50,000 in DC savings at state pension age, £2,000 in DB entitlement and a state pension of £164 per week would pay an average of £35.50 in tax if they withdrew their pension through an annuity.

However, total tax payments would be significantly higher if they withdrew their savings steadily over five years, up to an average of £5,388.

The average tax payment would increase further if withdrawn in one lump sum, up to £7,378.

Since the introduction of pensions freedom and choice in 2015, more people have been withdrawing their savings in the first five years or all at once, leading to the expectation that tax payments will increase.

Additionally, in the three years since pensions and freedoms, HMRC have seen increased tax revenue of at least £1bn each year.

Wilkinson continued: “Based on the way in which people have so far accessed their savings since the pension freedoms were introduced, HMRC could see increased tax revenue of around £19.2bn over the next ten years. Although some of these increases will result from the fact that people are increasingly reaching retirement with higher levels of DC savings, which means they may be offset by higher levels of tax relief received during the accumulation phase.

“Calculating the impact on means-tested benefits is more complex as it is sensitive to individual saving levels, retirement income decisions and potential application of the deprivation of assets rule. The impact could also be reduced by low levels of take-up of means-tested benefits among people over pension age.”

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