A former pensions minister has hit out at the ‘stupidity’ of the way pension withdrawals by the over 55s are taxed.
The latest figures from HM Revenue & Customs show that retirement savers overpaid £22 million in income tax on cash they withdrew from their pensions in the first three months of this year.
Since April 2015, that takes the total overpaid and refunded to £285 million, says Steve Webb, who was the Liberal Democrat pensions minister in David Cameron’s government.
He explained the tax on most cash withdrawals under pension freedom rules are based on an emergency tax coding, which routinely return tax deductions that are inaccurate.
Retirement savers then must reclaim the overpayment to which they are entitled.
To make a claim, retirement savers must complete one of three HMRC forms – and if they make a mistake must start the claim again.
In the first three months of 2018, around 10,000 taxpayers staked a claim for a repayment.
Most were on Form P55 (6,218) for taking some cash as a irregular withdrawal but leaving a balance in their fund.
Another 3,448 used a Form P53Z for taxpayers with other income taking all their pension cash, while the rest – 988 taxpayers – filed a Form P50Z for taxpayers without other income emptying their fund.
If the claim form is correctly submitted, HMRC should take 30 days to make the repayment.
“These quarterly figures are a regular reminder of the absurd way in which pension withdrawals are taxed,” said Webb.
Jumping through hoops
“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 It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns.”
HMRC says that if pension payments were made free of tax, they would have to chase thousands of people for money they underpaid and may have already spent.