HM Revenue & Customs has repaid a total of £794 million to pension savers who have been overtaxed on their withdrawals since the pension freedoms were introduced in April 2015, with repayments rising in every quartet of 2021.
Between July and September of this year, HMRC repaid £44.6 million to savers, with an average reclaim of £3,352, according to its latest pension schemes newsletter. The £44.6 million overcharge in Q3, follows £33 million overcharged in the second quarter and £23 million overcharged in Q1 of 2021.
The overpayment occurs because HMRC applies an emergency tax code to a saver’s first withdrawal. Those taking a regular income should have their tax code adjusted automatically but those taking out a lump sum need to fill out a series of forms to reclaim their money within 30 days.
Tom Selby, head of retirement policy at AJ Bell, said: “Savers accessing their pension need to be aware that HMRC will apply an emergency ‘Month 1’ tax code to their first withdrawal, meaning they will initially be overtaxed, potentially by thousands of pounds.
“While those taking a regular income should have their tax code adjusted automatically, anyone making a single withdrawal in the tax year will need to fill out one of three HMRC forms to get their money back within 30 days. If they don’t, they will need to wait until the end of the tax year, when HMRC says they should receive a rebate.”
Selby said as the Government looks at increasing digitisation in the administration of pension tax relief, policymakers should use this opportunity to assess the current approach to the taxation of pension freedoms withdrawals.
He added: “At the moment savers risk being left out of pocket to the tune of thousands of pounds when they access their retirement pot. If this process could be automated and the need to fill out a complex reclaim form removed, it would significantly improve the tax system for retirees.”
Jon Greer, head of retirement policy at Quilter, called the current pension system “clunky”. The fact that overpayments have been rising this year suggests “more and more pension savers are dipping into their pension,” he said.
“This highlights the importance of getting financial advice before touching your pension. Working with someone who knows and understands the system and can plan financial affairs thoroughly will reduce the risk of lost income being handed to the tax authorities.”
Jessica List, Pension Technical manager at Curtis Banks, added: “It’s astonishing that HMRC is still having to process thousands of forms and repay tens of millions of pounds every quarter simply in relation to incorrect tax being deducted from flexible pension payments. This quarter shows the highest figures since Q3 of 2019 and is among the highest recorded in terms of average repayment amounts.
“While there may not be a way to ensure every retiree pays the correct amount of tax on their first pension payments, it must be worth exploring options to improve the experience for savers and reduce the administrative burden on HMRC in the longer term.”
