HM Revenue & Customs (HMRC) revealed that it repaid £794m ($1bn, €939m) to retirees since the introduction of pension freedoms in 2015.
Between July and September 2021 alone, repayment receipts totalled £45m.
This is largely due to the fact that when a saver takes advantage of pension freedoms to flexibly access their pots, their first withdrawal is taxed through an emergency ‘Month 1’ tax code.
And if they do not make any further withdrawals, or receive regular income from their pension – as this would automatically adjust the code – they will need to claim back their money.
AJ Bell explained that ‘Month 1’ taxation is calculated by dividing a retiree’s usual allowances by 12 and applying that to the initial withdrawal – a bill that could be of “thousands of pounds”.
The figures for Q3 2021 alone suggest an average refund of more than £3,300.
Tom Selby, head of retirement policy at AJ Bell, said: “Savers accessing their pension need to be aware that HMRC will apply an emergency ‘Month 1’ tax code to their first withdrawal, meaning they will initially be overtaxed – potentially by thousands of pounds.
“While those taking a regular income should have their tax code adjusted automatically, anyone making a single withdrawal in the tax year will need to fill out one of three HMRC forms to get their money back within 30 days.
“If they don’t, they will need to wait to the end of the tax year, when HMRC says they should receive a rebate.
“The government is looking at increasing digitisation in the administration of pension tax relief as part of the budget. Policymakers should use this opportunity to assess the current approach to the taxation of pension freedoms withdrawals.
“At the moment, savers risk being left out of pocket to the tune of thousands of pounds when they access their retirement pot. If this process could be automated and the need to fill out a complex reclaim form removed, it would significantly improve the tax system for retirees.”