• Savers overtaxed on pension freedoms withdrawals have reclaimed £716 million since the reforms were introduced in 2015, AJ Bell analysis of HMRC data shows
• In the first 3 months of 2021, over 7,000 official reclaims worth £23 million in total were made to HMRC (https://www.gov.uk/government/publications/pension-schemes-newsletter-129-april-2021/pension-schemes-newsletter-129-april-2021)
• However, the true overtaxation figure will be substantially higher as most people don’t fill out the official reclaim forms
Tom Selby, senior analyst at AJ Bell, comments: “An eye-watering £716 million has now been repaid to people who have been overtaxed on their pension withdrawals since April 2015.
“This overtaxation occurs because when someone accesses their retirement pot ‘flexibly’ for the first time in a tax year, HMRC applies an emergency ‘Month 1’ tax code to the withdrawal.
“Flexibly accessing your pension includes taking income via drawdown or withdrawing ad-hoc lump sums.
“In reality, £716 million 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.
“To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time.
“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.”
Source: HMRC Pension Schemes newsletters
How savers who have been overtaxed can claim their money back
If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that over the course of the year you are taxed the correct amount.
However, if you make a single withdrawal then you will either need to take action by filling out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.
Which form you need to fill out will depend on how you have accessed your retirement pot:
• If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z
• If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50
• If you’ve only flexibly accessed part of your pension pot then use form P55.
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
