The Office for Budget Responsibility (OBR) has revised its estimate for the amount of tax over-55s will pay on flexibly withdrawing from their pensions in 2021/22 up to £1.7bn.

This represents a £0.4bn increase in tax receipt in comparison to 2020/21 and a £0.5bn rise on its previous estimate in October 2021.

The increase in flexible withdrawals between April and December 2021, which the OBR said was likely due to a pandemic-driven increase in the number of people bringing forward their retirement plans and facilitating that with earlier access to their pension pots, led it to revising up its forecast “significantly”.

Furthermore, it has revised its pensions tax receipt estimate from 2022/23 onwards up by an average of £0.8bn a year, as the OBR assumes that people will make use of earlier withdrawals to manage the rise in the cost of living this year, and that the ‘steady state’ level of withdrawals will be higher than it had previously assumed.

In relation to public service pensions, the OBR noted that, relative to its March 2020 forecast, net public service pensions will be up by £0.6bn in 2021/22 and 2022/23.

Net public service pensions will then be “significantly higher” in 2023/24 and 2024/25, by £3.6bn and £5bn respectively, according to the OBR’s latest estimate.

These increases were attributed to a combination of factors, namely higher inflation, the addition of McCloud remedy payments, the unwinding of delayed retirement experienced in some schemes, and a correction identified in its October 2021 forecast.

The OBR continued: “Relative to our October 2021 forecast, spending in respect of unfunded schemes has been revised down by an average of £0.1bn a year.

“Higher CPI inflation raises spending on pensions in payment by £1.3bn a year on average, which is more than offset by stronger pay growth increasing scheme income by an average of £1.8bn a year. Funded public sector schemes are little changed from our October 2021 forecast.”

Commenting, Aegon head of pensions, Kate Smith, said: “The government has missed a clear opportunity to increase the Money Purchase Annual Allowance, something the pension industry has been calling on since the start of the pandemic.

"OBR data is predicting that over-55s are expected to access their pensions earlier, and take out more money, simply to maintain their cost of living as pay packets are squeezed even further. It’s clear few people have understood the consequences of flexibly accessing their pensions, potentially with devastating consequences for their future finances.

“It’s time that this little-known complex rule is increased to £10,000 allowing people to rebuild their pension savings and getting their retirement plans back on track. ”

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