A sharp rise in withdrawals from pensions driven by growing anxieties surrounding the upcoming budget, could see HMRC overcharging pension savers and having to make even more overpayment refunds, warn commentators.
The latest Pension Flexibility data shows between 1 July and 30 September £44.3m has been repaid to people who paid too much tax when first accessing their pensions.
While this quarter has seen a slight decrease in overpayments compared to the last, it underscores the ongoing complexity and inefficiencies in the system when it comes to flexible pension withdrawals, and show that pension tax overpayment refunds continue to be a substantial issue, says Jon Greer, head of retirement policy at Quilter.
“Despite a gradual easing in cost-of-living pressures, these figures suggest that many are still drawing from their pension savings to navigate financial challenges. However, what’s particularly concerning is that we may see a sharp rise in withdrawals in the next set of data, driven by growing anxieties surrounding the upcoming budget,” he warns. “With persistent rumours and the government’s rhetoric pointing to a ‘painful’ fiscal event, many savers may take unplanned action to take tax-free cash from their pension pots, fearing potential changes to pension taxation. This could lead to hasty decisions, which may not be in their long-term financial interests. Clearly this is not intentional policy by the government but might come to be an unfortunate by-product nevertheless.
“The tax system’s inherent flaws place a heavy burden on retirees. The PAYE system, while effective for regular income, struggles to accommodate the way pensions are accessed under the freedoms introduced in 2015. As a result, emergency tax codes are often applied to withdrawals, leading to significant overpayments and unnecessary delays in reclaiming funds. With an average refund still substantial, the need for reform is clear.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown added that with the issue now in its ninth year, “it’s a situation that beggars belief with around £1.3bn in total being refunded so far.
“You can get the extra money refunded but this is not the point. Many of these people will not have been expecting this and the extra tax bill will have come as a nasty shock. It may even have undermined plans that people had for the money in the short term, and it takes time to sort out. It’s an extra complexity that no-one needs and should have been resolved many years ago.”
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