Yahoo Finance HMRC under growing pressure to stop over-taxing pension savers' withdrawals
Tens of thousands of people are being overtaxed - in some cases by as much as £15,000 - when making one-off withdrawals from their savings using the "pension freedoms" that came into force in April 2015.
HM Revenue and Customs (HMRC) now faces growing pressure to overhaul the way it taxes pensions, as more evidence of savers losing out. The and pensions committee MPs, whose inquiry into success of pension freedoms closed yesterday, is being urged to address the issue.
Two former pension ministers have added their voices to those calling for action, following a campaign waged by this newspaper.
"The way in which pension withdrawals are taxed is little short of a scandal," said Sir Steve Webb, pensions minister from 2010 to 2015 and and now director of mutual insurer Royal London.
"It cannot be right that HMRC knowingly overtaxes people to the tune of £100m per year and then expects thousands of individuals know which form to fill get their money back."
Since April 2015 anyone 55 and over has been able make cash withdrawals their private pension savings whenever they like. The the brainchild of former chancellor George Osborne, allow savers to take their entire pot in one go or make regular and one-off payments.
But these new freedoms conflict with how HMRC normally taxes income. Its "pay as you earn" (PAYE) system works on the basis of regular payments.
If you earn a lot more in one month than usual you may pay more tax initially, but this will be corrected via tax codes in subsequent months when HMRC sees your income drop.
However, many people using the pension freedoms take a single large payment once a year or even less frequently - for instance to pay off a mortgage or help children on to the housing ladder.
HMRC assumes these unusually large payments are the first of equally sized, monthly withdrawals. A £10,000 lump sum can, therefore, be taxed as if the individual would earn £120,000 a year. The problem is that the tax office's system only gives one twelfth of the "personal allowance", the amount you can earn each year without paying income tax.
Assuming no other income, you should be able to withdraw £11,500 a year completely tax-free. But if taxed on a "month one" basis, an £11,500 payment from a pension pot would be hit with a £3,650 tax charge.
Unsuspecting savers are then left short or forced to make a second withdrawal to cover the shortfall. Once they realise they have paid too much tax, savers must fill out one of three "mini tax return" forms to reclaim the overpaid tax. The tax office promises to repay within 30 days of the correct form being returned, but readers have reported being made to wait far longer.
You can reclaim money but it's not straightforward and it's not fair to savers. This is undoing some of the benefit of the pensions freedoms
Baroness Altmann
If the saver never realises they have been overtaxed, they will eventually get a refund, HMRChas claimed, but it could not say how long this would take. Since April alone, more than 10,000 refunds have been paid out, totalling more than £26m.
The scale of the overpayments has been suggested as one of the reasons the Treasury has banked far more than expected as a result of the reforms. Official figures show £1.1bn was taken in 2016-17, compared with the Governmen't initial £600m estimate.
Baroness Ros Altmann, pensions minister from 2015 to 2016, said the current system was attractive to HMRC because it meant it collected tax earlier.
"You might have had something important you were planning to use the money to pay for, then find it's not there. You can reclaim money but it's not straightforward and it's not fair to savers. This is undoing some of the benefit of the pensions freedoms."
An HMRC spokesman said: "Claimants presenting their 2017-18 P45 to their pension provider always pay the correct tax. In the event they don't, any discrepancy will be settled within 30 days of us being notified."
sam.brodbeck@telegraph.co.uk
