Marvin OnumonuBetween 1st July and 30th September, HMRC repaid £44.3m to individuals who paid too much tax upon accessing their pensions, according to the latest Pension Flexibility data.
Overpayment occurs because HMRC may place people on an emergency tax rate, treating a lump sum as if it were a regular monthly payment.
Those affected can reclaim the money by completing one of three forms, with refunds paid directly into bank accounts, or wait for a refund at the end of the tax year.
HMRC data showed that 12,002 repayment claims were processed between July and September 2024.
These refunds amounted to £3,691 on average per individual.
Reaction:
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:
“The pension tax saga drags on well into its ninth year with HMRC repaying almost £44.3m to people who were overtaxed on pension withdrawals over the quarter.
“It’s a situation that beggars belief with around £1.3bn in total being refunded so far.
“You can get the extra money refunded but this is not the point. Many of these people will not have been expecting this and the extra tax bill will have come as a nasty shock.
“It may even have undermined plans that people had for the money in the short term, and it takes time to sort out.
“It’s an extra complexity that no one needs and should have been resolved many years ago.
“The reason this happens is that you can be put on an emergency rate of tax whereby HMRC treats it as though that first payment will be repeated every month.
“You can try to mitigate this by making your first pension withdrawal a small one if possible.
“If you do get landed with a bill, then you can get it rectified quickly by filling out a form and getting your money back as soon as possible.”
Jon Greer, head of retirement policy at Quilter:
“While this quarter has seen a slight decrease in overpayments compared to the last, it underscores the ongoing complexity and inefficiencies in the system when it comes to flexible pension withdrawals.
“Despite a gradual easing in cost-of-living pressures, these figures suggest that many are still drawing from their pension savings to navigate financial challenges.
“However, what’s particularly concerning is that we may see a sharp rise in withdrawals in the next set of data, driven by growing anxieties surrounding the upcoming budget.
“With persistent rumours and the Government’s rhetoric pointing to a ‘painful’ fiscal event, many savers may take unplanned action to take tax-free cash from their pension pots, fearing potential changes to pension taxation.
“This could lead to hasty decisions, which may not be in their long-term financial interests.
“Clearly this is not intentional policy by the government but might come to be an unfortunate by-product nevertheless.
“The tax system’s inherent flaws place a heavy burden on retirees.
“The PAYE system, while effective for regular income, struggles to accommodate the way pensions are accessed under the freedoms introduced in 2015.
“As a result, emergency tax codes are often applied to withdrawals, leading to significant overpayments and unnecessary delays in reclaiming funds.
“With an average refund still substantial, the need for reform is clear.
“It is vital that those considering pension withdrawals amid these budget rumours seek professional financial advice.
“A rush to take money out could result in unnecessary tax liabilities, and careful planning is essential to avoid making decisions that might compromise their retirement plans.
“Advisers can help structure withdrawals effectively, ensuring savers do not fall foul of the tax system’s pitfalls.
“Until the system is changed, we are likely to continue seeing many savers caught out and forced to reclaim significant sums of money.”
