Anyone over 55 could be owed £3,691 by HMRC due to tax trap – are you one of them?
PENSIONERS could be owed money by HMRC as thousands have been over charged.
Anyone from the age of 55 who takes money out of a workplace or personal pension as a lump sum could be owed money back.
New figures from HMRC today reveal that almost £44.3million was refunded to retirees between July and September 2024 alone.
This comes after the record £57million that was refunded last quarter.
In that same period, more than 12,000 claims were processed in total.
It works out that the average reclaim payment was £3,691 per person.
However, how much you overpaid could be higher or lower based on individual circumstances.
Why are pensioners overtaxed?
This is part of a long-running issue caused by emergency tax codes applied to pension withdrawals under the pension freedoms introduced in 2015.
Since the changes, anyone over 55 can access their pension flexibly, but HMRC often taxes large withdrawals as if they will be repeated monthly, resulting in overpayments.
Jon Greer, head of retirement policy at Quilter, expressed concern about the system’s flaws.
He noted that while there has been a slight drop in the number of overpayments this quarter, the issue remains significant.
John said: “The PAYE system is designed for regular income and struggles with the complexities of flexible pension withdrawals.
“As a result, many pensioners are overtaxed, and the refund process can be frustratingly slow.”
For many pensioners the tax bill can come as a unsavoury surprise.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The tax bill can come as a nasty surprise for people expecting to access their savings without a hitch and can throw off financial plans.”
What is pensions auto-enrolment?
Here's what you need to know about pension auto-enrolement:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
How to get your cash back
For those hit by the tax trap, the process of getting their money back involves filling out specific forms as quickly as possible.
You can wait for HMRC to review your tax code at the end of the tax year and it will process a refund, but obviously, this means you could be waiting a while.
To get the cash back faster, you can fill in one of three forms: a P55, P53Z or a P50Z which can all be found on the Government’s website.
Which form you need to fill out will depend on how you have accessed your retirement pot:
- If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
- If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
- If you’ve only flexibly accessed part of your pension pot then use form P55.
To avoid having emergency tax deducted in future, try taking smaller amounts out rather than one lump sum.
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
More than £1.3billion has been refunded since the pension freedoms began in 2015, highlighting the scale of the issue.
Experts are urging savers to proceed with caution, especially with speculation around potential changes to pension tax rules in the upcoming budget.
Financial advisers are recommending that anyone considering a withdrawal seek professional advice to avoid falling into this tax trap.
Jon said: “It is vital that those considering pension withdrawals amid these budget rumours seek professional financial advice.
“Advisers can help structure withdrawals effectively, ensuring savers do not fall foul of the tax system’s pitfalls.
“Until the system is changed, we are likely to continue seeing many savers caught out and forced to reclaim significant sums of money.”
With proper planning, pensioners can ensure they don’t face unnecessary tax bills or delay in getting their money back.
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.