Pension freedoms over-taxation hits £433m

Over-taxation of pension freedoms has meant that a total of £433m has been reclaimed from HMRC by members withdrawing their pensions in the past four years.

Figures released by HMRC today, 30 April, show that £31m was reclaimed in the first quarter of 2019, averaging around £2,500 per claim.

Those experiencing over-taxed pension freedom withdrawals will have to wait at least 12 months to get their money back or contact HMRC to reclaim their cash, which can affect anyone who takes a taxable pension freedoms payment from the age of 55, either via a drawdown or uncrystallised funds pension lump sum withdrawal.

AJ Bell senior analyst, Tom Selby, said: It is now over four years since the pension freedoms were introduced and HMRC’s highly dubious tactic of hitting savers with an emergency tax charge on their first withdrawal still hasn’t been formally consulted on or reviewed.

“Regardless of whether you think this is the right approach or not, this failure to properly consider a policy which impacts hundreds of thousands of savers is nothing short of a disgrace.”

According to the figures, 12,600 official reclaim forms were completed in Q1 2019, however, the Financial Conduct Authority has previously suggested that around 150,000 of pensions are accessed for the first time each quarter, and are all at risk of being overtaxed.

An individual making a £10,000 withdrawal with no other taxable income could be hit with an unexpected bill of £2,958.

“As is so often the case, the people most likely to be negatively impacted are the less wealthy who aren’t familiar with tax forms and can’t afford to pay for financial advice,” Selby added.

“While Brexit is understandably dominating political discourse at the moment, government still has a duty to make well-evidenced policy and enact changes where citizens are penalised unfairly."

The government has faced repeated calls to end its “tax first, ask questions later” approach of taxing pension freedom withdrawals. In 2017, Royal London wrote to the Work and Pensions Committee calling on them to change their approach.

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