Pension freedoms could cost retirement savers almost £20 billion in income tax over the next decade.
But how much each saver pays could vary widely depending on how they decide to access their money, says a study by the Pensions Policy Institute.
The PPI says 54% of defined contribution pension pots accessed under pension freedoms were fully withdrawn.
Almost a third (30%) are in drawdown, 13% of retirement savers have bought an annuity with their funds and 3% were accessed as uncrystallised lump sums.
HM Revenue & Customs has already collected an extra £1 billion in tax a year since pension freedoms were introduced in 2015.
The PPI report explains that the tax take is lower than estimated and the future figures cannot be predicted with certainty.
“This uncertainty is because individuals will pay different amounts of tax based on the retirement income decisions they make. The extent to which this will impact state finances is dependent on the behaviour of those accessing their pension savings,” says the report.
“To estimate the cost, assumptions must be made about the way that people will choose to access their savings over the course of their retirement.”
Other factors that could impact how much tax retirement savers will pay on their funds include how much they have saved.
Impact of financial decisions
“Although some of these increases will result from the fact that people are increasingly reaching retirement with higher levels of defined contribution savings, which means they may be offset by higher levels of tax relief received during the accumulation phase,” said PPI policy researcher Lauren Wilkinson.
“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.
“On balance, PPI modelling suggests that any increases means-tested benefit expenditure excluding support for care needs upon older pensioners might be more than offset by a reduction in means-tested benefits to younger pensioners.”
The report also points out that although annuity income is taxed, someone withdrawing their entire fund would pay more tax because they cannot apply annual tax-free allowances.