Pension savers dipping into their pot have reclaimed £892m in overpaid tax over the past seven years, latest government figures show.
The overpayments are due to tax code errors on pension withdrawals since the introduction of pension freedoms in April 2015, according to analysis of HMRC statistics by investment platform AJ Bell. More than £33m was repaid to around 10,000 people who paid too much tax on pension withdrawals in April, May and June, with the average reclaim amounting to £3,363.
The pension freedoms allow savers to access their defined contribution pensions, sometimes known as a money purchase pension, from the age of 55. Read more in our article Your pension options at retirement. If you’ve dipped into your pension since 2015, you may have overpaid tax if you’ve taken a taxable lump sum from your pension for the first time, or withdrawn the entire pension at once in a single tax year.
However, you won’t have overpaid tax if you’ve withdrawn 25% or less of your pension, which is the tax-free amount you can take from the age of 55. You can find out more about the rules in our article How much tax will I pay when I withdraw my pension?
If your pension provider didn’t have the correct tax code for your personal circumstances at the time of the withdrawal, it may have taken the wrong amount. Providers tax savers accessing taxable income from their pension for the first time on a ‘month 1’ basis. This assumes that you will continue to make withdrawals, and could have seen you pay thousands of pounds more in tax than you should have done.
Laura Suter, head of personal finance at AJ Bell, said: “It’s ridiculous that so many pensioners are unnecessarily overtaxed by the government because the system hasn’t been fixed. A bit like going on ‘emergency tax’ if you first start a job and haven’t provided your details in time, pensioners are being over-taxed but through no fault of their own. The fact that pensioners have been overtaxed by £892m since pension freedoms were introduced in 2015 shows the scale of the issue. What’s more, many won’t understand the fiendishly complicated tax system and how to claim the money back – or indeed that they are entitled to a rebate.”
“As the cost of living crunch bites, and particularly hits pensioners, we could see more people taking lump sums from their pension to top-up their income, meaning more could be caught in this tax trap. What’s more, as people struggle to pay bills the last thing they need is to be owed money by the taxman.”
These pension freedoms don’t apply to defined benefit or final salary pensions, which provide you with a guaranteed retirement income that amounts to a proportion of your final salary.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
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What can you do if you might have overpaid tax?
If you’ve overpaid tax on your pension withdrawals since 2015, you should receive an automatic refund. HMRC is in the process of applying the correct tax code to the accounts of those affected, and reimbursing people by the end of the tax year on 5 April 2023.
However, you are able to claim this money earlier if, for example, you need it to help make ends meet as living costs rise. If you think you might have been affected, you can submit a claim by completing the relevant form, and which you use depends on your personal circumstances. If you withdrew all your pension savings and received no other taxable income that tax year, use form P50Z. If you withdraw all your pension savings but had other taxable income that tax year, use form P53Z. Finally, if you withdraw some cash from your pension, but not all of it, you should use form P55. Once you’ve completed the correct form, you should receive your refund within 30 days either by cheque or directly into your account.
Where to get more help
Working out how much tax you should be paying on your pension income can be complicated, so if you’re not sure how to proceed, it’s worth taking professional advice. If you’re aged 50 or over and have a defined contribution pension, you can get free guidance on your options from the Government’s Pension Wise service.
If you’re seeking specific recommendations for your personal circumstances, you’ll need professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased.