Savers hit by £400 million since freedom rules introduced

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Posted on: 25th April 2019

Since the introduction of the new rules to the pension system, pensioners have been overtaxed by more than £400 million. This information has been revealed by HMRC in light of pension freedom rules which came into effect in 2015. The plan was designed to allow savers over the age of 55 to withdraw money from their retirement port whenever they wish without the need to buy annuity. At the time, the freedoms were labelled a “radical shake-up” that allow more control over pension income. However, HMRC estimates hundreds of thousands of people have been overtaxed when making a withdrawal.

Withdrawals

Since the freedom rules were first implemented, there has been almost £23.6 billion taken out of pension pots. In the last 6 months of 2018, savers withdrew £6.13 billion. One way of withdrawing money from a pension pot is to take an “uncrystallised fund pension lump sum”, also known as UFPLS. 25 per cent of this sum is tax-free. The second option is through a drawdown plan, which again, means 25 per cent of the money will be tax-free.

Which? explained how the money is likely to be taxed on an “emergency rate”. This is due to the tax being collected by your pension company who are yet to be made aware of your correct tax code of other income. The tax is based on what is known as a “month 1” basis, which assumes the lump sum you are taking out will be repeated each money.

Overtaxed

Since the introduction of the new rules, HMRC has refunded £402,743,108 in overpaid tax from pension savings. In the last quarter of 2018 alone, those who had to claim back overpaid tax stood at roughly 14,000 people with an average claim of £2,161. Since 2015, a total of 174,260 people have been forced to claim back overpaid tax on their pension.

Former pensions minister and director of Royal London, Sir Steve Webb, described the latest findings as “outrageous” when speaking to Which?.

He said, “Since the system started in 2015, more than 170,000 people have had to fill in forms to claim back tax they should never have had to pay. There are ways to get around the system, such as making a small initial withdrawal which should trigger HMRC to issue a tax code which can then be applied to larger withdrawals. But all of this adds delay and inconvenience. The system should be run for the convenience of taxpayers, not the convenience of HMRC.”

Stay alert

Which? is advising savers to be careful when considering touching their pension and to always check tax liabilities. Those who have been overtaxed must fill out one of the three claims forms that are available on the UK government website. If the complete pension pot has yet to be withdrawn, a P55 form must be filled in. However, if all the money has been taken out and the saver also receives other taxable income, a P53Z must be completed. For those who have drawdown their entire pension, but have no other taxable income, a P50Z form must be filled out.

Stay on top of your savings with Haven IFA

Of course, with an independent financial adviser by your side, you can relax knowing you’re on top of your pension savings. If you would like to learn more about pension savings and retirement, get in touch with Haven IFA today.