Savers overtaxed on pension freedom withdrawals have reclaimed £716m since 2015, when changes were introduced that allowed savers to flexibly access their pensions.
The overtaxation occurs when someone accesses their retirement ‘flexibly’ for the first time in a tax year – which can include taking income via drawdown or withdrawing ad-hoc lump sums – HMRC applies an emergency ‘Month 1’ tax code on the withdrawal.
The saver can then either contact the taxman and fill out a reclaim form, or rely on HMRC to put them in the correct position at the end of the year.
In the first three months of 2021 alone, more than 7,000 official reclaims worth £23m in total were made to HMRC.
AJ Bell senior analyst Tom Selby said the £716m was only the tip of the “overtaxation iceberg”, as the figure only relates to those who filled out HMRC’s official reclaim form – something most people do not do.
“To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time,” he said.
“Given the steadfast reluctance of HMRC to even countenance reform of the taxation of pension freedoms withdrawals, it is down to individual savers to navigate the system to ensure they aren’t short-changed.”
An HMRC spokesperson said: “Nobody will overpay tax as a result of taking advantage of pension flexibility. Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days.
“Anyone who does not claim will be automatically repaid at the end of the year.”