Drawdown: £716m tax reclaims ‘just the tip of the overtaxation iceberg’
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Savers overtaxed on pension freedoms withdrawals have reclaimed £716m since the reforms were introduced in 2015, new analysis of HMRC data shows, casting further doubt over how effectively people are taxed when they first access their pension.
When people withdraw funds from their pension for the first time in a tax year, HMRC levies emergency tax on the assumption that the same amount will be withdrawn every month. Where people make regular withdrawals in the year, tax will subsequently be adjusted to the actual sums taken; but where pensioners make just one withdrawal, they remain overtaxed unless they fill in one of three claim forms.
New figures show that in the first three months of 2021, more than 7,000 official reclaims worth a combined £23.2m were made to HMRC. The true figure could be significantly higher, as many people do not fill out the official reclaim forms, according to investment platform AJ Bell.
“In reality, £716m is just the tip of the overtaxation iceberg, as it only covers those who fill out HMRC’s official reclaim forms – something we know most people don’t do,” said AJ Bell senior analyst Tom Selby.
“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,” he said.
In 2020, about 38,000 official reclaim forms were processed by HMRC, while more than 600,000 people flexibly accessed their retirement pot for the first time.
Slight fall in average amounts withdrawn
During the first three months of 2020, reclaims hit £33m, even though more people withdrew from their pensions in the first quarter of this year than a year earlier – 383,000 compared with 348,000. At the same time, the value of the average withdrawal fell from £7,070 to £6,790.
Lower spending needs in lockdown could be behind the slight drop in the average withdrawal from pensions in the first three months of this year, said Becky O’Connor, head of pensions and savings at platform provider interactive investor.
“However it’s a mixed bag, with our own data from SIPP customers showing some older workers and retirees choosing to take more from their pensions,” she cautioned, saying that some older people have lost income during the pandemic and might need to tap into pension pots earlier.
The total value of flexible withdrawals from pensions since flexibility changes in 2015 has now exceeded £45bn.
