HM Revenue & Customs has refunded more than £44 million in over taxation on pension withdrawals in the first three months of this year.
Official figures show over 15,000 reclaim forms were processed during the first quarter, with an average reclaim of £2,881.
Since 2015, over £1.4 billion has been repaid to people who were overtaxed on their first pension withdrawal, as HMRC’s approach to flexible pension withdrawals continues “to hit hard-working savers in the pocket”, say experts.
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket.
“These figures are likely to be only the tip of the iceberg, however, as they only capture those who fill in the relevant HMRC reclaim form. In reality many more people will not 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 at the end of the tax year.”
From April 2025, the Government is improving its tax code process so those taking regular drawdown income will be moved from an emergency code to paying the right amount of tax more quickly, but Selby says this won’t help those taking a one-off withdrawal.
“We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms. It is simply unacceptable that after all this time the Government has still not managed 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, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days,” added Selby.
Jamie Clark, retirement specialist at Quilter, commented: “The latest pension flexibility statistics reveal HMRC’s plans to streamline tax coding from the current tax year couldn’t come soon enough.
“HMRC’s new tax coding process should not only reduce the administrative burden on savers, but hope it will also minimise the number of overpayments being made in the first place. Nonetheless, pension withdrawals will remain a challenge. Many people are still reliant on their pension savings to manage financial pressures, and any hasty decision to access these funds could not only result in unintended, and often unexpected, tax consequences, but they could also hamper longer-term financial plans.”
Clark added: “With hope, we will see the number of repayment claim forms being processed fall from here on out thanks to HMRC’s efforts to improve the system, but there is still a long way to go to ensure it works seamlessly. In the meantime, it is likely that some retirees will still face significant overpayments and subsequently the often arduous task of reclaiming their money.”
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