HM Revenue and Customs has repaid just over £36m to people who withdrew part of their pension but were overcharged on their tax bills in the last quarter.
Nearly ten per cent of those taking a flexible payment from their pension between July and September made a reclaim, with the average amount coming in at £2,300.
The likes of former pensions minister Steve Webb have recently been campaigning for reform of HMRC’s pension tax administration. Currently, defined contribution pension withdrawals are not taxed on a cumulative basis each month like pay-as-you-earn taxes are, so savers will be taxed as if they made the same withdrawal each month of a year, even if they chose to reduce withdrawals or space them out, unless their provider has a tax code to use for them.
Hargreaves Lansdown head of policy Tom McPhail says: “In theory HMRC processes mean even if you don’t fill in the form and immediately reclaim overpaid tax, you should eventually get the money back. The problem is HMRC isn’t infallible: if you don’t take the initiative and ask for the money back, you risk missing out; at best you’ll miss out on the use of the money for up to a year.
“This is a clumsy system which is certainly not designed with the best interests of the investor at its heart. HMRC and pension providers should be able to request the appropriate tax code in advance of making any payment, the technology is there to do this kind of thing.”
The HMRC data released yesterday also shows that a further £1.59bn was accessed from pensions in the third quarter of 2017, a fall from £1.86bn the previous quarter, but more individual payments were made.