2 weeks Ago By Rory Poulter
Flaws in the tax regime saw people taking money out of the pension pots overcharged by £44 million between July and September, according to official HMRC data. The problem occurred because the HMRC applies a punitive emergency tax rate to a first lump sum withdrawal, which leaves the people involved thousands of pounds out of pocket. The HMRC system treats the withdrawal as if it were a regular monthly payment rather than a one-off, which results in the overcharging.
As a result, some 12,331 people overpaid tax for the three-month period with the average sum involved put at £3,691. The issue stems from a mismatch between the PAYE system and the pension freedoms introduced in 2015, which allow people over the age of 55 to take lump sums from their pension pot. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The pension tax saga drags on well into its ninth year, with HMRC repaying almost £44.
3m to people who were overtaxed on pension withdrawals over the quarter. It’s a situation that beggars belief, with around £1.3bn in total being refunded so far.
“You can get the extra money refunded, but this is not the point. Many of these people will not have been expecting this and the extra tax bill will have come as a nasty shock. “It may even have undermined plans that people had for the money in the short term, and it takes time to sort out.
It’s an extra complexity that no one needs and should have been resolved many years ago.” She added: “The reason this happens is that you can be put on an emergency rate of tax whereby HMRC treats it as though that first payment will be repeated every month. You can try to mitigate this by making your first pension withdrawal a small one if possible.
“If you do get landed with a bill, then you can get it rectified quickly by filling out a form and getting your money back as soon as possible.” The new figures were published amid mounting speculation that the Chancellor will make significant changes to the size of the tax-free lump sums that people can take out from their pension pots. Reports suggested the tax-free limit could be cut by two-thirds of its current £268,275 level to £100,000.
Jon Greer, head of retirement policy at Quilter, says the recent figures show that this continues to be a "substantial issue" as Brits look to ease their financial pressures by withdrawing from their pension savings. He said: "What’s particularly concerning is that we may see a sharp rise in withdrawals in the next set of data, driven by growing anxieties surrounding the upcoming budget. "With persistent rumours and the government’s rhetoric pointing to a ‘painful’ fiscal event, many savers may take unplanned action to take tax-free cash from their pension pots, fearing potential changes to pension taxation.
" Mr Greer said the current tax system has "inherent flaws" and places a "heavy burden" on retirees as the PAYE system struggles to accommodate the way pensions are accessed. He added: "It is vital that those considering pension withdrawals amid these budget rumours seek professional financial advice. "A rush to take money out could result in unnecessary tax liabilities, and careful planning is essential to avoid making decisions that might compromise their retirement plans.
Advisers can help structure withdrawals effectively, ensuring savers do not fall foul of the tax system’s pitfalls. “Until the system is changed, we are likely to continue seeing many savers caught out and forced to reclaim significant sums of money.”.
