Savers reclaimed £57 million in overtaxation on pension withdrawals in the second quarter of this year.
Many people accessing their pension for the first time continue to charged too much tax on these withdrawals, due to the way HMRC’s computers process these payments.
Many in the industry have been calling for an overhaul of these systems since the introduction of pension freedom rules, with advisers saying it is an “outdated system” that unfairly penalises ordinary pension savers.
The latest figures published by HMRC show that over 16,000 reclaim forms were processed during the quarter, with an average reclaim of £3,540 – the third highest figure on record.
This latest quarterly data means that almost £1.3 billion has now been reclaimed by people overtaxed on withdrawals since 2015, when these pension freedom rules were introduced.
To reclaim this money savers can all out one of three HMRC forms and money should be repaid within 30 days. Otherwise overpayment should be refunded in the next tax year via the self assessment system. Savers can also afford getting hit with an unexpected tax bill by making a very small first withdrawal from their pension plan — but advisers say few are aware of these potential difficulties.
AJ Bell director of public policy Tom Selby says: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers, with the latest official figures revealing almost £1.3 billion has now been repaid to savers who were overtaxed on their first withdrawal, and filled out the relevant HMRC form to claim their money back.
“Worryingly, the average reclaim per person spiked to £3,540 during the latest quarter, the third highest three-month figure on record.
“The true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment system 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.”
Taxation errors occur as HMRC computer assume that a one-off withdrawals will be repeated each month, so will calculate the tax due on this notional ‘annual’ amount.
Selby adds: “It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact that people 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.”
“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown adds: “More than nine years after pension freedoms it is inconceivable to think that people are still being overtaxed on their first pension withdrawals.
“Almost £57m has been overpaid in the most recent quarter alone. Many of these people will not have been expecting this, and will have had a nasty shock when their tax bill was way higher than expected. This can cause them huge problems: a tax nightmare is not the way to start your retirement.
Of course, you can get a refund but this is a complication many people do not need and it’s a situation that should have been resolved years ago.”