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Overtaxing by HMRC on pension withdrawals has to stop

5 November 2019

Calls for HM Revenue & Customs to cease its practice of assuming a lump sum pension withdrawal is the first of a series of income payments, have increased as a record £54 million was returned to savers who were overtaxed on pension freedom withdrawals in the third quarter of this year.

In total, £535 million has been repaid to those who filled out the official reclaim forms since the introduction of the pension freedoms in April 2015, HM Revenue & Customs said.

Commenting on the latest figures, Tom Selby, senior analyst at AJ Bell, said: “Given most people don’t fill out these forms, this is almost certainly the tip of a sizeable iceberg.

“It is time for the government to accept that, while the retirement flexibilities introduced in April 2015 have been well received by savers, the tax system that sits alongside them is simply not fit for purpose. People risk being left short of money as a result of HMRC’s approach and forced to either take out more cash from their pension, potentially paying extra tax in the process, or seeking the funds from elsewhere.”

Selby said it would be particularly problematic for people who have earmarked their withdrawal for something specific, including long-term care costs or helping children on to the housing ladder.

He added: “At the absolute bare minimum the government needs to urgently review its approach to the taxation of pension freedoms withdrawals which has never been consulted on formally. Its failure to do this so far represents a serious failure of policymaking which will inevitably have caused people distress and potentially significant financial hardship.”

Under current rules, when an individual withdraws money from their pension, HM Revenue & Customs makes assumptions about how many more times they will make withdrawals over the rest of the year. Making the assumption they will make lots of withdrawals and go into the 40% tax band, they are often charged ‘emergency tax.’

Steve Webb, director of policy at Royal London, said: “Even by their own low standards, HMRC have outdone themselves in the last three months, taking more than £54m of savers’ money in income tax to which they were not entitled.   It cannot be right that tens of thousands of people each year have too much tax taken out of their pension and then have the hassle of filling in a form to get back money that is rightfully theirs. Whoever ends up running the country after the General Election needs to tell HMRC to stop this practice as a matter of urgency.”