As the average pension withdrawal hits a record low, it has emerged that HM Revenue & Customs (HMRC) have been forced to repay more than £400 million in overpaid tax by pensioners who have cashed in their savings.
Analysts at Royal London claim the taxman has had to make tax refunds to more than 174,000 over 55s who have cashed in all or part of their savings under pension freedom rules since the summer of 2015.
Under the new rules the first 25% of savings cashed in are tax free, but after that income tax is payable on any additional funds converted.
If the pension provider does not have the saver’s correct tax code HMRC apply an emergency code which results in a higher than normal tax deduction which must be reclaimed later.
Former pensions minister Steve Webb, now at Royal London, is calling for reform of the system.
He said: “These figures are a regular reminder of the absurd way in which pension withdrawals are taxed.
HMRC is perfectly happy to over-tax tens of thousands of people each year and make them jump through hoops, having to choose between three different forms to complete and then wait to get their money back.
“This is a system run for the convenience of HMRC, not the taxpayer. It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns.”
A spokesman for HMRC replied: “Claimants presenting their 2018/19 P45 to their pension provider will pay the correct tax. In the event they don’t, any discrepancy will be settled within 30 days of HMRC being notified.”
The rate at which savers are cashing in their pension pots dropped to a record low at the end of 2018.
The average withdrawal in the last three months of the year was £7,197. More than 264,000 savers made total withdrawals were £1.9 billion.
Analyst Tom Selby said the lower figure could be ‘a sign of restraint’ because of the increased volatility of global stockmarkets.
He said: “In these circumstances it can be sensible to cut back withdrawals in order to ensure you don’t run out of money during retirement.
“The past 12 months will have been particularly difficult for anyone who entered drawdown for the first time – especially if they took large income withdrawals just as markets hit the skids.
“Although it is too early to draw firm conclusions about why this has happened, it could be a sign of people showing restraint in how they spend their hard-earned retirement pots.”