Pension savers have now reclaimed over £1bn in overtaxation on pension withdrawals since 2015, with more than £48m reclaimed in the first quarter of this year.
HMRC data reveals that the average reclaim in Q1 2023 was £3,062, down slightly versus the previous quarter – suggesting more people are accessing smaller retirement pots.
Chancellor Jeremy Hunt eased the penalty applied to those who flexibly access taxable income from their retirement pot in his March Budget. As a result, those caught by the ‘money purchase annual allowance’ (MPAA) now see their annual allowance cut from £60,000 to £10,000, where previously it would have dropped to just £4,000.
Former pensions minister Steve Webb, now at LCP, described the overtaxation as ‘a disgrace’.
Tom Selby, head of retirement policy at AJ Bell, says: “It is astonishing that over £1 billion has now been reclaimed by savers overtaxed on pension withdrawals since the retirement freedoms were introduced in 2015. It is a scandal that government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
“These recent figures also suggest the number of people accessing their pensions is on the rise as the cost-of-living crisis continues to eat into people’s living standards. In fact, the £48 million repaid to people in January, February and March this year was the second highest figure on record, coming off the back of £45 million that was repaid in the previous quarter.
“While it is good news that these people have at least received the tax they are owed, depressingly the true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
“Those who flexibly access their retirement pot as a result of spiralling inflation at least have some breathing room to rebuild their pensions after Chancellor Jeremy Hunt hiked the money purchase annual allowance from £4,000 to £10,000. This is still a substantial reduction on the standard £60,000 annual allowance available to those who haven’t accessed their pension flexibly, but it at least gives people a fighting chance of getting their retirement plans back on track when this crisis abates.”
Andrew Tully, technical director, Canada Life says: “The latest HMRC numbers just show how complex the tax position around pension withdrawals is. Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals which would mean HMRC is not processing refunds to the tune of £1bn.
“A good tip for those customers making a pension withdrawal for the first time, is to initiate a small withdrawal of say £100. That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place.”
Steve Webb, Partner at LCP says: “This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right. There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place. And we are not talking about small sums, with over £1 billion being paid back by HMRC so far. Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury”.
£1bn in overtaxed pension reclaimed by savers
