Latest data from HMRC show that pension tax overpayment refunds were £48,550,827 in the first quarter of 2023, more than double the £22 million repaid in Q1 2022.
The increase in the number of claim forms processed, demonstrates “the continued necessity for people to access their pension funds amidst the intensifying cost-of-living crisis impacting day-to-day financial situations,” Jon Greer, head of retirement policy at Quilter said.
“The ongoing cost-of-living crisis is exerting significant pressure on personal finances, and it is likely that more people will need to access their pension savings in the coming months to make ends meet.”
However, the reclaim process means that people are having to wait for money when they need it more than ever, he added.
“This system clearly needs a rethink as these ever increasing figures do not point to a process that is working well.”
Andrew Tully, technical director, Canada Life echoed Greer’s comments: “The latest HMRC numbers just show how complex the tax position around pension withdrawals is. Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals which would mean HMRC is not processing refunds to the tune of £1bn.
A good tip for customers making a pension withdrawal for the first time, he said, is to initiate a small withdrawal, for example, £100. “That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place.”
Tom Selby, head of retirement policy at AJ Bell, went further, calling it “a scandal that government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill.”
The tax bills can often run into thousands of pounds, and require individuals to fill in one of three forms if they want to get their money back within 30 days.
Selby added: “The £48 million repaid to people in January, February and March this year was the second highest figure on record, coming off the back of £45 million that was repaid in the previous quarter.
“While it is good news that these people have at least received the tax they are owed, depressingly the true over taxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment process 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.
“Those who flexibly access their retirement pot as a result of spiralling inflation at least have some breathing room to rebuild their pensions after Chancellor Jeremy Hunt hiked the money purchase annual allowance from £4,000 to £10,000. This is still a substantial reduction on the standard £60,000 annual allowance available to those who haven’t accessed their pension flexibly, but it at least gives people a fighting chance of getting their retirement plans back on track when this crisis abates.”
