HMRC has recently announced that it is refusing to rethink its current position on the taxation of pension freedoms withdrawals, which AJ Bell has said will deliver a “bitter blow” to millions of savers.
Under the existing rules, providers are required to charge ‘Month 1’ emergency tax the first time someone uses the pension freedoms to access their retirement pot. The means that those who make a single flexible withdrawal from their fund in a tax year receive one twelfth of their usual tax allowances.
The pensions industry has been urging HMRC to revisit its approach, while the Office of Tax Simplification (OTS) recently warned that rules governing the taxation of pension freedoms withdrawals are poorly misunderstood by consumers.
Despite this, the Revenue said in a recent update that it will not revisit the policy.
Commenting on the matter, AJ Bell senior analyst Tom Selby said: “This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years. While almost £300 million has been repaid to savers since the pension freedoms were introduced, many more who didn’t fill out the required forms will have been left short-changed for up to a year.
“By continuing to overtax people who use the pension freedoms as the Government intended, HMRC risks pushing people into financial difficulty and forcing them into taking out more than they need to, potentially creating an extra tax liability as a result.
“HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating. The current system was introduced without consultation and leaves millions of savers at risk of being hit with a shock tax bill.
“At the very least we need a public consultation on HMRC’s approach to determine whether the current approach can be improved for the benefit of savers.”
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