Pension savers are being overtaxed at record levels when they dip into their retirement pots. More than 200,000 over-55s have clawed back nearly £500 million since pension freedoms were introduced in 2015. But the taxman is pocketing on average £2,355 too much when retirees make their first withdrawal. This is because HM Revenue & Customs (HMRC) charges them a so-called emergency rate of tax. To get their money back, savers must then fill in a complex, nine-page form, or wait up to a year for a rebate.
The amount of tax being reclaimed is at its highest level since the pension freedoms were brought in to allow savers access to their retirement funds without having to buy an annuity (a guaranteed regular income). Latest HMRC figures show around 17,000 people clawed back nearly £47 million in tax between April and June this year alone.
This is compared to £29 million claimed by 14,000 savers in the same three-month period last year. And this does not include the tens of thousands of people who could still be waiting for a rebate. Figures from City watchdog the Financial Conduct Authority (FCA) suggest more than 200,000 people a year risk being overtaxed when making withdrawals from pension savings for the first time.