New figures suggest many people are owed refunds
New figures from HM Revenue and Customs ( HMRC ) reveal the taxman handed back £48.7 million between April and June last year to pensioners who’d been hit by overpaid tax on their retirement pot withdrawals. Pensions expert Helen Morrissey found that roughly 13,000 refund forms got the green light during those three months, with the typical claimant receiving around £3,800 back.
The Hargreaves Lansdown retirement analysis chief spelled out how Brits dipping into their pension savings for the first time often get hit with excessive tax. The culprit? HMRC’s system wrongly assumes the identical sum will be taken out month after month, landing savers with a tax shock they weren’t expecting.
While the cash can be taken back from HMRC, Morrissey warns it’s an ‘admin headache’ that retirees shouldn’t have to deal with in the first place, reports the Daily Record.
She said: “The overpaid pension tax saga continues to drag on. In just three months, HMRC has repaid a whopping £48.7m to people who paid too much tax for simply accessing their pension. With an average refund of around £3,800, these refunds amount to a significant chunk of change.
“The problem hits people who are taking a lump sum from their pension for the first time. They get taxed on what is known as a ‘month 1’ basis, which means it’s treated as though the same amount will come out every month. This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans.”
She continued: “The money can be reclaimed. HMRC processed close to 13,000 forms between the beginning of April and the end of June, but it’s an admin headache that people can well do without. Ten years on from the advent of Freedom and Choice it’s a process that should have been consigned to history.”
Ms Morrissey also outlined ways to sidestep an unwelcome tax charge. She explained: “There are things you can do to mitigate it. For instance, you could make your first pension withdrawal a relatively small one.
“However, if you were looking to take a lump sum to fund travel or home renovations, for instance, you will need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans. If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund. Otherwise, you can wait until the end of the tax year.”
