£1bn pension freedom figure is not the whole truth

The government has been quick to claim a victory with the publication of its pension freedom figures, but the numbers don't tell the whole truth.

Chancellor George Osborne has said £1 billion of pension cash has been put into the pockets of retirees since the pension freedoms were introduced on 6 April. The government is using the large headline figure to congratulate itself on a job well done.

However, the Treasury can't tell us by what route that £1 billion made it from pensions to pockets. I've asked the Treasury press office for a breakdown of how much of that £1 billion was tax-free cash that would have been available anyway, how much would have been available under the 'trivial commutation' rules that already allowed access to pension pots under £30,000, how much has come from annuities and how much is drawdown.

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The short answer is the Treasury doesn't have that information. This means there is no way of guessing just how successful pension freedom has been.

Pre-April there were plenty of ways to get cash out of your pension. Most people knew about the 25% tax-free cash that is one of the major draws of pension saving. Just because you take the 25%, or a lower percentage if you wish, didn't mean you had to start taking the income.

Lesser known were the trivial commutation rules that allow you to access small pension pots as cash. Pre-April the total amount that could be taken was £18,000 and that amount has been increased to £30,000. So again, individuals could get their hands on a sizeable sum without full pension freedom.

And let's not forget there are still plenty of people – in fact most people – who are planning on being pretty sensible with their cash and are leaving it in their pension for now.

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Tax take

With £1 billion out of pension, there is also a sizeable sum that has been paid to the Treasury in tax. Accountants at Baker Tilly estimate that the total tax paid on the £1 billion that has been accessed is around £150 million, in line with official forecasts.

If the forecasts remain correct then total tax paid on pension withdrawals in 2015/16 will top £320 million.

The tax take is the real victory for the Treasury, not the fact it believes pension freedoms are working – whatever way the money comes out, the taxman will take his slice.

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