Savers have reclaimed £970 million in overtaxation on pension withdrawals since 2015, AJ Bell analysis of HMRC data reveals.
More than £45 million was repaid to 14,335 people overtaxed on pension withdrawals in October, November and December 2022 – the highest Q4 figure on record and third highest of any three-month period since April 2015.
The average reclaim in Q4 2022 was £3,141, down slightly versus the previous quarter – suggesting more people are accessing smaller retirement pots.
Anyone who flexibly accesses taxable income from their pension will trigger the ‘money purchase annual allowance’, slashing their annual allowance from £40,000 to just £4,000.
Treasury under growing pressure to address the pension tax penalty facing older people who return to work.
Tom Selby, head of retirement policy at AJ Bell, comments: “As surging inflation eats into people’s spending power, there is mounting evidence savers are turning to their retirement pots to make ends meet.
“We already know flexible pension withdrawals spiked in the early part of 2022, with £3.6 billion of retirement money accessed between 1 April and 30 June 2022 – a 23% increase compared to the same period in 2021.
“This is now filtering through into pensions overtaxation figures, with a staggering £45 million repaid to savers in the final three months of 2022 – the highest Q4 figure on record and third highest since the pension freedoms were introduced in April 2015.
“The total overtaxation figure has now reached £970 million and will inevitably pass the £1 billion landmark in 2023.
“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.”