HMRC has now repaid more than £1.5bn to people who have been overtaxed on pension withdrawals since Pension Freedom rules were introduced.
In total pension savers reclaimed £48.5m in the third quarter of 2025, pushing the total repaid past the £1.5bn mark for the first time.
In total 13,721 pension savers put in a claim for overpaid tax on pension withdrawals during this three month period, a rise of 11 per cent on the same period last year.
This comes despite HMRC making moves to address this problem for those taking regular drawdown payments at the start of this tax year.
From April 2025, the government improved its tax code process so people are moved from an emergency code to paying the right amount of tax more quickly when taking drawdown.
But AJ Bell points out that this does not help those taking a one-off withdrawal, who will continue to be overtaxed. It describes this issue as one of the “fundamental flaws” with the current system which has not been addressed despite Pension Freedom rules being introduced a decade ago.
The problem arises as HMRC computer systems effectively treat a one off withdrawal as though this income will be withdrawn every month, and will be taxed on this notional annual income.
AJ Bell director of public policy Tom Selby says: “HMRC is still yet to address one of the longstanding flaws in its approach to taxing those who choose to flexibly access their hard-earned pension pots.
“More than £1.5 billion has now been repaid to people initially overtaxed on their first withdrawal who have since had to fill out the relevant HMRC form to claim back their money.
“This outdated approach means many are forced to take matters into their own hands to be reunited with their money, but these figures are likely to only be the tip of the iceberg, as they only capture those who fill in the relevant HMRC reclaim form. In reality, many will be reliant on HMRC putting their affairs in order at the end of the tax year.
Quilter head of retirement policy Jon Greer adds: “A decade after the introduction of pension freedoms, it remains extraordinary that thousands of people are still being overtaxed every quarter simply for accessing their own savings. The system continues to work against the very flexibility it was designed to promote.
“Although HMRC has made changes to speed up repayments, these figures show the underlying problem persists. The PAYE system was built for regular employment income, not one-off pension withdrawals, and it continues to cause unnecessary complexity for retirees.
“Part of the reason more retirees are feeling the sting of tax on their pension withdrawals is that the state pension now consumes a growing share of the personal allowance. With the allowance frozen and the state pension rising each year, many people are being dragged into the tax net. When they make flexible withdrawals to top up their income, a larger portion is now taxable, compounding the frustration when over-deductions occur.
“This quarter’s data also land at a time of significant Budget uncertainty, with speculation about changes to pension tax relief and allowances prompting some people to act hastily rather than wait.
“Those decisions, often driven by fear of future rule changes, risk damaging well laid future financial plans. It underlines how vital stability and clear communication are if the Government wants to maintain confidence in the pension system.”