Higher taxes from people retiring

Before pension freedoms in 2013 annuity sales were in the region of 90,000 per quarter and this figure decreased 75% to about 20,000 per quarter in 2015.

Most of the defined contribution (DC) pension funds taken as cash were small funds under £15,000.The higher revenue received was due to people taking larger amounts of money than they would have done with an annuity resulting in a higher amount of tax paid at their marginal rate.

The government said the original costing assumed individuals would spread their withdrawals over four years, but the latest HMRC information points to larger average withdrawals than they expected so they shortened this assumption to three years.

They have now brought forward the peak year of yield from 2018-19 to 2017-18.

HMRC data also suggest that 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.

We now expect the measure to bring in £1.6 billion in 2017-18 and around £0.9 billion a year for the remainder of the forecast.

Reducing the tax people pay

The personal allowance for 2016/17 is £11,000 pa increasing to £11,500 pa for 2017/18 tax year. Most people would already receive some income at retirement from other pension schemes and State pension absorbing the allowance so taking a additional pension fund as a lump sum would mean paying basic rate tax.

To reduce tax at retirement you can consider other options such as flexi-access drawdown allowing you to take your tax free lump sum now and leave the remaining fund invested, take an income, a lump sum to minimise tax.

As an alternative, uncrystallised fund pension lump sum (UFPLS) would allow you to take your tax free cash as part of an income reducing the amount od tax paid. This approach can be an advantage as the fund remains invested over time allowing the amount of tax free cash in the future the opportunity to increase.

For a low risk investor you can consider a fixed term annuity allowing you to select an income and term for the plan. A five year plan would allow you to vary the income you take from nil up to the initial amount selected. Any income not taken accumulates in your account until it is needed without the deduction of tax.

A guaranteed maturity amount is available at the end of the term when you can consider all options again such as an annuity from any provider or flexi-access drawdown.