Thousands of people who have been taxed too much on their pension withdrawals are failing to claim that tax back, according to AJ Bell.
The firm explained that many pension schemes do not have tax codes for their members.
To overcome this problem, HM Revenue & Customs requires the pension provider to apply tax on a "month one" basis.
That means it must assume that the sum withdrawn in the first month will be repeated every month.
If the member withdraws £10,000 in month one, the scheme will therefore assume that their annual income will be £120,000 a year, and tax them accordingly.
In the case of a £10,000 withdrawal, the member would pay £3,099.46 in tax.
But if the member made no further withdrawals that year, that £10,000 ought to be tax free.
Someone making a one-off withdrawal of £40,000, meanwhile, would pay £16,428.56 in tax, rather than the correct amount of £5,798.
AJ Bell cited FCA data showing an average of 139,000 pension pots per quarter had been accessed since pension freedoms were introduced in 2015.
The firm claimed the majority of these initial withdrawals were likely to have been taxed on a "month one" basis under HMRC rules - meaning thousands of people were probably owed tax back.
But according to HMRC data from 2016, on average only 10,998 claims for tax back were being made per quarter.
In total, HMRC paid back £108m in 2016. That compared to the £2.6bn the government has stated it expects to have received in tax in the first two years of pension freedoms.
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."
For people looking to reclaim tax paid on pension withdrawals, the government states they should fill in form P50Z if the withdrawal used up their pension pot and they have no other income; form P53Z if they have other taxable income; or form P55 if they didn't use up their pension pot, they are not taking regular payments, and their pension provider cannot refund the money itself.
Kusal Ariyawansa, a Manchester-based chartered financial planner with Appleton Gerrard, said the "month one" system was not an issue for his clients for two reasons.
Firstly, they all did an annual tax return; and secondly, most had not yet drawn down on their taxable pension because they had other sources of income.
"Unfortunately, for people on lower incomes who have no access to advice, this could be a big problem," he said.
He was sceptical, however, that better education would solve the problem, saying most people would ignore announcements from HMRC.
"The best thing to for the Revenue to do would be to use technology to make tax instant," he said.
james.fernyhough@ft.com
