Budget 2014: Pension change will accelerate tax collections

GOVERNMENT changes to pension will see the rate of tax collections likely to accelerate in the short term.

The rate of tax on pension income will fall from 55% to marginal income tax rates if the whole pension pot is withdrawn. People will also be able to withdraw their pension pot in its entirety whenever they choose, rather than at retirement age, as is currently the requirement.

The measure will see the government coffers increase over the short to medium term budget papers stipulate. “The latest move will accelerate the collection of tax,” warns Geraint Jones, private client tax partner at Reeves.

“This is likely to increase the number of people withdrawing pension income as there will no longer be a heavy disincentive of the 55% tax rate on withdrawals.”

The government anticipates that under these new circumstances some people will choose to draw down their pension sooner in order to suit their personal situation. “This will increase income tax revenue in the short to medium term,” the papers said.

The government expects to make £320m in 2015/16; £600m in 2016/2017; £910 in 2017/2018; and £1.2bn in 2018/2019.

Pensioners can still take a 25% tax-free lump sum from their pension pot.

From next week retirees will also only have to prove they have £12,000 of income coming in from combined state pension and retirement plans before they can draw on their pension without having to buy an annuity – the previous amount was £20,000 annually. They can then draw on their pension paying tax at a marginal rate.

In further changes the government has increased the size of withdrawal from a small pension pot to £10,000 from £2,000, however, the number of small pension pots you can withdraw lump sums has increased to three from two.

Reitrees will now be able to draw their entire pension pot at 55 but only until 2028 when the age will rise to 57.

Delivering the changes Osborne said: “We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

Osborne announced that the government would set aside £20m to provide free impartial advice on pensions.