Pension savers had to reclaim £42 million in over-taxation on pension withdrawals in the final quarter of 2021, with more than 13,000 people continuing to fall victim to the government’s tax charges.
Figures published by HM Revenue & Customs show that a total of £800 million in overpaid tax has been refunded since the pension freedom reforms were introduced in 2015.
The rules mean pension savers can withdraw money from age 55 in small amounts or as a lump sum but while this has created more flexibility around pensions, those who access their pot can be affected by an emergency tax code applied to the first flexible withdrawal of the tax year.
Commenting on the figures, pension experts called for the government to overhaul the system to prevent pension savers being penalised.
Tom Selby, head of retirement policy at AJ Bell, said: “Savers continue to be hit in the pocket by HMRC simply for accessing their retirement pot. In the final quarter of 2021 alone over £42 million was refunded to savers who had been overtaxed, with the average repayment sitting at £3,107.
“What’s more, the true figure is likely to be significantly higher as this only covers people who fill out one of three official reclaim forms. HMRC says those who don’t go through this process will be refunded at the end of the tax year.
“It is beyond belief as the seventh anniversary of the pension freedoms reforms approaches that the tax system continues to operate in this way. Having introduced flexibility over pension access from age 55, an upgrade of the tax system is now long overdue.”
Jon Greer, head of retirement policy at Quilter, commented: “Once again pension savers are being caught out by our clunky pension taxation system. More often than not, these overpayments result from emergency tax being applied often when people start to take money from their pension.
This highlights the importance of getting financial advice before touching your pension. HMRC will make a repayment automatically, but this could take some time so if you want a refund to come through more quickly, then make a repayment claim yourself to avoid waiting for HMRC.
“Working with someone who knows and understands the system and can plan your financial affairs thoroughly with you will reduce the risk of lost income being handed to the tax authorities, or if it is taken then helping to reclaim it speedily and effectively.”
