HM Revenue & Customs (HMRC) published data that shows savers have now reclaimed £1bn ($1.24bn, €1.13bn) in overtaxation on pension withdrawals since 2015.
More than £48m was repaid to 15,856 people overtaxed on pension withdrawals in January, February and March 2023 – the highest Q1 figure on record and second highest of any three-month period since April 2015, when pension freedoms was introduced.
The average reclaim in Q1 2023 was £3,062, down slightly versus the previous quarter – suggesting more people are accessing smaller retirement pots.
Steve Webb, partner at pension consultancy firm LCP, said: “This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right.
“There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place. Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury.”
Andrew Tully, technical director, Canada Life, added: “The latest HMRC numbers just show how complex the tax position around pension withdrawals is. Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals, which would mean HMRC is not processing refunds to the tune of £1bn.”
Tips
Tully also provides a suggestion for assisting pension savers.
“A tip for those customers making a pension withdrawal for the first time, is to initiate a small withdrawal of, say, £100,” he said. “That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals.
“This will result in the tax taken at source being far more accurate in many more cases. This will not only reduce the burden of paperwork but, equally importantly, the customer will receive a more accurate withdrawal in the first place.”
Jon Greer, head of retirement policy at Quilter, also points to the impact on people during the current economic environment.
He said: “This huge increase in the number of claim forms processed demonstrates the continued necessity for people to access their pension funds amidst the intensifying cost-of-living crisis impacting day-to-day financial situations. Unfortunately, this system leads to prolonged waiting periods for people to receive their full expected amount at a time when they need it more than ever.
“The ongoing cost-of-living crisis is exerting significant pressure on personal finances, and it is likely that more people will need to access their pension savings in the coming months to make ends meet.”
Bigger issue
Greer also believes that the problem could be bigger than it seems.
“It’s also worth bearing in mind that the statistics don’t show the number of people who don’t make an in-year reclaim and are thus waiting for an automatic repayment after the end of the tax year in question,” he added. “The issue is therefore much bigger than reported in these statistics.
“This system clearly needs a rethink as these ever-increasing figures do not point to a process that is working well.”
