Thousands of pensioners overcharged £10,000 on pension withdrawals
Thousands of pensioners have claimed back more than £10,000 after being overcharged tax on their pension withdrawals, new analysis shows.
A handful of people in the UK were given a refund worth more than £100,000.
The HMRC figures, which were obtained by Royal London through a freedom of information (FOI) request, show an increase in the number of refunds claimed in 2023-24.
Pension freedoms, which came into force from 2015, gave over-55s a range of options over how to use their defined contribution (DC) pension pot.
Generally, people can take up to 25 per cent of their pension as a tax-free lump sum, and the remaining 75 per cent is taxed as income.
However, an “emergency” rate is applied to pension withdrawals, with HMRC assuming it will be the pensioner’s monthly income for the rest of the tax year.
This means that people could be overcharged if they make one-off withdrawals.
Around 60,000 pension savers claimed refunds in the 2023-24 tax year, 20 per cent more than the roughly 50,000 the previous year, Royal London’s data showed.
About 11,700 pensioners claimed back £5,000 or more, including 2,400 who were given refunds in excess of £10,000.
The average refund was worth £3,342, which was £280, or nine per cent, more than 2022-23.
The top 25 refunds averaged at £106,900, according to the data.
Clare Moffat, pension expert at Royal London, said: “It’s incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000.
“Not only do these taxes usually come as a massive shock, the unexpected tax amount can also scupper people’s carefully laid plans.
“HMRC recently announced an overhaul of its emergency taxing codes on pensions, which it promises will deliver quicker refunds, but that doesn’t mean people won’t still be charged the higher rate in the first place.”
From April, HMRC changed its process so that tax codes are automatically updated for individuals newly receiving a private pension.
Moffat said the government’s decision that unused pension funds will be subject to inheritance tax from 2027 means “more and more people are considering dipping into their pension pots while they are alive” to make large lifetime gifts to loved ones.
Pensions are currently exempt from inheritance tax so are seen as a tax-efficient way of passing on wealth.
“A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals,” she said.
“So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”
About £1.4bn has been refunded since 2015, the figures revealed.
HMRC has been contacted for comment.
By Anna Wise, PA Business Reporter