Despite protests from retirement savers and financial firms about unfair tax charged on pension withdrawals, HM Revenue & Customs refuses to budge.
Even the government’s own moderator, the Office of Tax Simplification has called for treating pension withdrawals under emergency tax coding rules.
The current rules demand that any retirement saver taking money from a pension is tax-treated under emergency tax rules if they cannot provide an up-to-date tax code.
The rule means that thousands of retirement savers pay tax at a higher rate than they should on pension withdrawals and must fill in one of three forms to reclaim the overpaid tax with interest.
Pension drawdown rules
Under the rules, the payment is treated as if it is made each month, even though in most cases, the payment is a one-off sum, while reclaiming overpayments can tie up money for several weeks.
“We’ve concluded that any changes at the current time would not significantly improve the tax position for the majority of recipients of a flexible drawdown payment when compared to the process currently in place,” says HMRC.
Critics claim that HMRC runs the rules for convenience rather than for the benefit of retirement savers.
“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,” said former pensions minister Steve Webb, now with pension provider Royal London.
Belligerent refusal
“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 It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns.”
Investment platform AJ Bell analyst Tom Selby argues that overpaying tax risks putting people into financial difficulty.
“HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating,” he said. “The current system was introduced without consultation and leaves millions of savers at risk of being hit with a shock tax bill.
“We need a public consultation on HMRC’s approach to determine whether the current approach can be improved for the benefit of savers.”
