Pension savers reclaim £32m this year in emergency tax on withdrawals
More than 10,000 pension savers reclaimed a share of £32m from HMRC in the first three months of this year after being over-taxed on withdrawing their money.
A total of 10,397 tax-overpayment claims were made to HMRC in the first quarter of 2020, resulting in repayments of £32.6m – an average of around £3,000.
Pension freedoms enable savers aged 55 and over unfettered access their pots. When someone takes their first flexible withdrawal from their pension, it’s more likely their pension provider won’t have a tax code for them.
Under HMRC rules, pension providers apply tax on a ‘month 1’ basis so the withdrawal is counted as if that amount of money will be taken every month for the next year, rather than as a one-off withdrawal.
The tax is therefore calculated based on a much higher annual withdrawal than savers actually take.
In the 2019/20 tax year, HMRC repaid £166m after too much tax was deducted, and to date, pension savers have reclaimed £600m under this clunky ‘tax first, reclaim later’ process.
See YourMoney.com’s guide on How to reclaim pension over-tax for more information.
Pension money withdrawals
The statistics come as figures reveal that between January and March 2020, £2.5bn was withdrawn from pensions flexibly.
This is a 19% increase from the £2.1bn recorded in Q1 2019.
Since 2015, the total value of withdrawals as part of the pension freedoms has now exceeded £35bn and have been accessed by 1.4 million individuals.
Nearly 350,000 individuals accessed their pensions on this basis, representing a 23% increase from the 284,000 reported in the same quarter last year.
The average amount withdrawn stood at £7,100, falling 3% from the £7,300 figure in Q1 2019.
Steven Cameron, pensions director at Aegon, said there is a big question over how the use of pension freedoms will be affected by the coronavirus crisis, both in terms of challenges to individuals’ financial positions and recent and likely ongoing stockmarket volatility.
He said: “For those facing financial difficulty, pension freedoms offer flexibility to ease financial burdens in uncertain times, such as those we are experiencing today. However, freedom comes with great responsibility and it is crucial that people understand the risks associated with drawing down their retirement savings which for many need to last a lifetime. For many, it may be better and more tax efficient to use other sources of savings first.
“The coronavirus and ensuing market volatility highlights the risks involved and we encourage individuals whether considering or in drawdown to avoid panic measures and to seek financial advice or guidance before making important decisions.”