HM Revenue & Customs’ “outdated approach” to the taxation of flexible pension withdrawals continues to hit savers, with the latest data showing that pension savers reclaimed almost £50 million in overtaxation on pension withdrawals in the fourth quarter of 2024.
According to HMRC, more than 14,600 reclaim forms were processed during the period October to December 2024, with the average reclaim totalling £3,389.
In total, almost £1.4 billion has now been reclaimed by people overtaxed on pension withdrawals since 2015.
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket. This is likely only the tip of the iceberg, however, as it only captures those who fill in the relevant HMRC reclaim form. In reality, lots of 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.”
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis. This means the tax authority divides the usual tax allowances by 12 and applies them to the withdrawal. While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
Pension savers can reclaim their money back within 30 days if they fill out one of three forms. For those who do not, they must wait for HMRC to repay them at the end of the tax year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, commented: “Of course, the money can be refunded but it’s an unnecessary complication that threatens to cause chaos for people’s retirement plans. Almost ten years on from the introduction of Freedom and Choice, it is a problem that should have been solved long ago.”
To ease the problem, HMRC has announced that from April 2025, it will improve its tax code process so people will be moved from an emergency code to paying the right amount of tax more quickly.
Morrissey said: “This is great news for those taking regular income from income drawdown but the problem persists for those taking lump sums.”
Jon Greer, head of retirement policy at Quilter, said: “While the planned reforms to automatically update tax codes for new pension recipients are promising, it remains to be seen whether they will fully address the complexities and inefficiencies of the current system.
“Until systemic reforms are fully implemented, retirees will continue to face the risk of significant overpayments and the need to navigate a cumbersome claims process to reclaim their money. HMRC’s efforts to address these issues are a step in the right direction, but there is still a long way to go to build a system that works seamlessly for savers.”
Selby added: “It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the 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, often running into thousands of pounds.”
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