Calls for reform to the tax treatment of flexibly withdrawn pensions
09 May 2023
It’s been reported that individuals who’ve flexibly withdrawn their pensions savings have temporarily overpaid more than £1 billion in tax.
Often, when pensioners take money from their pension pots, they’re charged tax based on an emergency tax code, and must wait for HM Revenue and Customs (HMRC) to issue a refund of that tax taken. Figures highlight that £160 million was repaid last year, and since 2015, the total amounts to more than £1 billion.
Since 2015, it’s been possible for individuals to withdraw a portion of their defined contribution pension savings, from age 55 onwards. The remainder must stay invested.
At the point of withdrawal, they’re often charged tax on an emergency tax code and must complete one of three HMRC forms to get it paid back. The refund of tax should normally be returned within 30 days. If no form is completed, the individual must rely on HMRC to review the payments, which can happen upon submission of a self-assessment tax return. HMRC can then issue a refund accordingly. What this means is that, although the individuals affected aren’t permanently at a financial loss, it could be several months before they receive the tax that’s been taken from them back. Given the current cost-of-living crisis, this could put people in positions of financial turmoil.
The latest Pension Schemes Newsletter also highlights the fact that more than £48 million was repaid to 15,856 people in overpaid tax on flexible withdrawals, from January to March 2023.
Considering these new findings, many are now calling for reform in this area. A spokesman for HMRC said:
“Nobody overpays tax as a result of taking advantage of pension flexibility. We will automatically repay anyone who pays too much because they are on an emergency tax code. Individuals can claim back any overpayment earlier if they wish."
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