Pension provider AJ Bell says it believes that thousands of people have paid too much tax on their pension withdrawals, and also that they are failing to take the opportunity to claim back the overpayments.
The problems stem from the fact that, as pension providers are not typically in possession of customers’ tax codes, they are required by HM Revenue & Customs to apply tax to the withdrawal on what is known as a ‘month one’ basis. This means that they must assume that the same amount is being withdrawn in every month of the tax year, so if £5,000 is withdrawn, the assumption must be made that a total of £60,000 will be withdrawn during the year.
It’s not hard to see how this policy is likely to lead to many customers being drawn into the higher rate income tax bracket, when in reality they should only be taxed at their marginal rate on a one-off withdrawal, or should not be taxed at all if the withdrawal is below the personal allowance.
AJ Bell cites data from the Financial Conduct Authority showing that an average of 139,000 people are accessing their pension funds each quarter. The firm adds that it believes the majority of these have been taxed according to the ‘month one’ method. However, HMRC data suggests only 11,000 people per quarter are making applications for tax refunds on their pension withdrawals.
As we reach the second anniversary of the introduction of the new pension freedoms, the firm comments that the additional tax payablr on a withdrawal of £10,000 is as high as £3,099.
Anyone who believes they are entitled to a tax refund on their pension fund withdrawal would either need to ensure they complete an annual self-assessment tax return, or would need to complete a form such as a P50Z, P53Z or P55.
Tom Selby, senior analyst at AJ Bell, said:
“HMRC’s insistence that an emergency tax code must be applied to pension freedom withdrawals means tens of thousands of people will have paid too much tax on their withdrawals yet very few of them have reclaimed this tax.
“This might be because they don’t know they have paid too much tax or the process to reclaim it just seemed too complicated.
“Whatever the reason, there is likely to be millions of pounds sat with HMRC that could be legitimately reclaimed. It is up to individuals to check whether they have paid too much tax and to make a claim, they are unlikely to get any help from the government.”
Financial advisers have a duty to consider all options when advising clients who are seeking to access their retirement savings. This of course includes informing them of the tax implications of the various alternatives. Consumers who do not use a financial adviser, however, may be totally unaware of this issue, and just how much additional tax they have paid.
Kusal Ariyawansa, an adviser at Manchester-based chartered financial planning firm Appleton Gerrard, said:
“Unfortunately, for people on lower incomes who have no access to advice, this could be a big problem.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.