HM Revenue & Customs (HMRC) refunded just over £45m ($55.7m, €51.2m) in overpaid pension tax in the last quarter of 2022.
This brings total repayments for 2022 at £134m, a reduction from £142m in 2021, averaging at £3,215 per claim.
The taxman had already been blasted in November 2022 for the overtaxation of pensions, with some industry players calling the issue a “quiet scandal”.
Since the introduction of pension freedoms in April 2015, HMRC has had to refund £970m in overpaid pension tax.
Jon Greer, head of retirement policy at Quilter, said: “Despite pension freedoms having come in around eight years ago, the way HMRC taxes lump sum withdrawals from pensions has never caught up and leaves people receiving less than they expected from their pension withdrawal.
“If someone wants to take a lump sum withdrawal, which many do, then it is often taxed at an emergency rate leading to you paying more tax than is needed upfront. If this happens then you can either wait until the end of the tax year and HMRC will make a repayment automatically, or where that could be many months away, it’s possible to make an ‘in year’ reclaim from HMRC taking five to six weeks. Approaching £1bn has had to be reclaimed in this way since pension freedoms were introduced in 2015.
“Many people take the lump sum option because they may need the funds to cover a one-time expense or financial emergency, and this adds further difficulties to the situation. While someone will eventually get the money back, it would seem unduly bureaucratic to expediate that process by having to make a claim themselves to receive their tax refund promptly. Many people will fail to make that reclaim, and could have to wait many months before the money is repaid.
“Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be found as right now the burden is being unduly placed on savers to not only recognise they are out of pocket, but then require them to fill out paperwork if they want their money back immediately.”
‘Ridiculous tax system’
But Tom Selby, head of retirement policy at AJ Bell, believes the £970m that has been refunded over the last eight years may not show the full picture of the problem.
“Depressingly, the true scale of the issue is likely much higher as many of those who have been overtaxed – in particular, people on lower incomes who are less familiar with the self-assessment process – will not go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting them right.
“It is ridiculous the tax system operates in this way and scandalous that the government has done nothing to address it almost eight years since the pension freedoms were introduced.”
Andrew Tully, technical director at Canada Life, added: “The latest HMRC numbers just re-emphasise the complexity of the tax position for those taking lump sums out of their pension. Almost eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around pension withdrawals which would mean HMRC is not processing refunds of over £40m in just a three-month period, and close to £1bn since 2015.
“For customers making a pension withdrawal for the first time, a workaround is to initiate a small withdrawal of say £100. That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. That will result in the tax being taken at source being far more accurate in many more cases, reducing the paperwork but equally importantly the customer receiving a more accurate withdrawal.”