Pension savers overtaxed on pension withdrawals have reclaimed £716 million since 2015, according to the latest figures from HM Revenue & Customs.
In the first three months of 2021, over 7,000 official reclaims worth £23 million were submitted to HMRC.
Over-taxation occurs when a pension investor accesses their retirement pot flexibly for the first time in a tax year, prompting HMRC to apply an emergency ‘Month 1’ tax code to the withdrawal. The individual has the option to either fill out a reclaim form or rely on HMRC to adjust their tax position.
However, Andrew Tully, technical director at Canada Life, described the tax system as “fiendishly complicated”, making it difficult for people to reclaim their money.
Tully said: “The pension tax system was never adapted to the way people are using the flexibility of the pension freedoms so have to complete one of the three separate forms to reclaim tax. One way to ensure you don’t pay too much tax is to request a small withdrawal from your pension provider. This will trigger the generation of a tax code from HMRC which is automatically sent to the pension provider. Subsequent withdrawals should then be taxed more accurately.”
Tom Selby, senior analyst at AJ Bell, said the true overtaxation figure is likely to be much higher than reported due to a lack of people filling out official reclaim forms.
Selby commented: “In reality, £716 million is just the tip of the iceberg as it only covers those who fill out HMRC’s official reclaim forms – something we know most people don’t do. To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time.
“Given the steadfast reluctance of HMRC to even countenance reform of the taxation of pension freedoms withdrawals, it is down to individual savers to navigate the system to ensure they aren’t short-changed.”