More than half a million people have now been forced to reclaim tax they never owed after dipping into their pensions, with former pensions minister Steve Webb saying the system is “designed for the convenience of the tax office, not the taxpayer.”
New HMRC figures released today show that over 502,000 official claims have been made by savers hit by emergency tax codes when accessing their defined contribution pensions and the system behind it remains unchanged nearly a decade after Pension Freedoms were introduced.
Webb has blasted HMRC for failing to fix what he calls a predictable and avoidable problem, with nearly £1.5 billion now repaid to pension savers since 2015.
He says: “How longer will all of this go on? Ten years on from the introduction of Pension Freedoms, tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC. “
Webb explains that when people take their first lump sum from a defined contribution pension, HMRC often applies an emergency tax code, assuming the withdrawal will be repeated monthly, which leads to far too much tax being taken. While the money is eventually paid back, it can take months unless people know to claim it back themselves using one of three specific forms.
Webb says: “Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of ‘business as usual’. It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions”.
The system has faced years of criticism but remains unchanged and Webb says the government should finally act to make it fairer and easier for people to access their pensions.
