The taxman has been forced to repay a record £38m in overpaid tax to individuals who availed of the pension freedoms, according to data from Her Majesty’s Revenue and Customs (HMRC).
The data, published yesterday (October 31) showed 18,353 successful claims for overpaid tax were processed by HMRC between July 1 and September 30, with the average refund amounting to £2,000.
This takes the total reclaimed since the launch of the pension freedoms in April 2015 to £372.5m.
Pension withdrawals above the maximum 25 per cent allowed tax free are levied at the marginal rate of tax of the taxpayer, but when HMRC has insufficient information about the tax payer emergency tax is levied, which can later be reclaimed.
Tom Selby, senior analyst at AJ Bell, said: "In reality the vast majority of people who are overtaxed aren't filling out the official reclaim forms, meaning the amount of emergency tax paid by savers will be much higher than this official figure."
According to the FCA, roughly 150,000 pension pots have been accessed for the first time each quarter since the pension freedoms were introduced and Mr Selby said most of these withdrawals were likely to have been overtaxed.
He said: "For those who access their pension for specific purposes such as paying down debt or funding care for an elderly relative, receiving potentially thousands of pounds less than they expected could present a very real financial challenge."
Ian Browne, pensions expert at Quilter, said: "It is astonishing that HMRC have failed to address the problem and are still forcing people to fill out time consuming paper work to simply get their money back.
"This antiquated system is begging to be modernised to account for this new retirement landscape."
A representative of HMRC said providers should ensure that the tax code of their client is up to date, and added:
“We have reviewed the PAYE process for lump sums taken under the pension flexibility rules where the emergency tax code is applied. We concluded that any changes would not significantly improve the tax position for the majority of recipients. The existing treatment remains the most effective method in these cases.”
Meanwhile, the Liberal Democrats have waded into the ongoing issue of protecting pensioners in defined benefit schemes from unsuitable advice.
Many people in these so-called gold plated schemes have been looking to transfer out to be able to gain access to their money under the freedoms.
Last year, as part of a suitability review, the FCA found only 47 per cent of the DB transfer cases it analysed were suitable, with 36 per cent being "unclear".
The party’s spokesman, Stephen Lloyd MP, called on the government to act to prevent the practice known as "factory gating", whereby unregulated introducers act as a link in the chain to entice pensioners to take unsolicited meetings with financial advisers.
His intervention comes in the wake of the government announcing measures to ban cold calling alongside this week's Budget but stopping short of cracking down on factory gating.