31 January 2023
If you are covering the latest HMRC pension tax overpayment statistics, please see the following comment from Jon Greer, head of retirement policy at Quilter:
“The confusing nature of our pension taxation system has once again resulted in HMRC having to pay up in tax overpayments. Although down slightly from 2021’s £142m, today’s figures show £134m was repaid to savers in 2022 in overcharged tax. This works out at an average of £3,215 per claim made.
“Despite pension freedoms having come in around eight years ago, the way HMRC taxes lump sum withdrawals from pensions has never caught up and leaves people receiving less than they expected from their pension withdrawal. If someone wants to take a lump sum withdrawal, which many do, then it is often taxed at an emergency rate leading to you paying more tax than is needed upfront. If this happens then you can either wait until the end of the tax year and HMRC will make a repayment automatically, or where that could be many months away, it’s possible to make an ‘in year’ reclaim from HMRC taking five to six weeks. Approaching £1bn has had to be reclaimed in this way since pension freedoms were introduced in 2015.
“Many people take the lump sum option because they may need the funds to cover a one-time expense or financial emergency, and this adds further difficulties to the situation. While someone will eventually get the money back, it would seem unduly bureaucratic to expediate that process by having to make a claim themselves to receive their tax refund promptly. Many people will fail to make that reclaim, and could have to wait many months before the money is repaid.
“Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be found as right now the burden is being unduly placed on savers to not only recognise they are out of pocket, but then require them to fill out paperwork if they want their money back immediately.”
