More than £42m was refunded in the fourth quarter of 2021 to savers who had been overtaxed on their pension freedoms withdrawals, new HMRC figures show.

This equates to an average repayment of £3,107 per saver for the period between October and December last year.

Pension savers have now reclaimed over £835m in overtaxation on pension freedoms withdrawals since the reforms were introduced in April 2015.

Overtaxation occurs because HMRC usually requires an emergency tax code to be applied to the first flexible withdrawal of the tax year. Where this is used, the normal tax allowances are divided by 12 and applied to the first withdrawal – leaving some savers to face far higher tax bills.

“Once again, pension savers are being caught out by our clunky pension taxation system, which has resulted in HMRC repaying pension savers over £42m in the last quarter 2021,” commented Quilter head of retirement policy, Jon Greer.
 
“Over the course of 2021, £142m was repaid by HMRC to pension savers, with the bulk of this in the third and fourth quarter of the year, implying that that more and more pension savers are dipping into their pensions in the latter half of the year.
 
“More often than not, these overpayments result from emergency tax being applied, often when people start to take money from their pension. It’s a little known quirk of the PAYE system that often results in considerable tax overpayments.

“This highlights the importance of getting financial advice before touching your pension.”

AJ Bell head of retirement policy, Tom Selby, warned the overtaxation figure could be even higher and suggested that an upgrade of HMRC’s system is now “overdue”.

“Savers continue to be hit in the pocket by HMRC simply for accessing their retirement pot,” he said.

“What’s more, the true figure is likely to be significantly higher as this only covers people who fill out one of three official reclaim forms. HMRC says those who don’t go through this process will be refunded at the end of the tax year.

“It is beyond belief as the seventh anniversary of the pension freedoms reforms approaches that the tax system continues to operate in this way. Having introduced flexibility over pension access from age 55, an upgrade of the tax system is now long overdue.”

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