HM Revenue & Customs (HMRC) has returned almost £26m in overpaid tax to savers who accessed their pensions during the last quarter of 2020.
The taxman said it had processed 8,000 pension flexibility claims forms and repaid £25.7m to people who had been charged emergency tax when they withdrew money from their pension pot.
Analysis of the data by AJ Bell found savers have reclaimed £693m since the pension freedoms were introduced in April 2015.
Tom Selby, senior analyst at AJ Bell, said: “There remains a serious flaw in the pension tax system which in all likelihood has left hundreds of thousands of people lumbered with a shock overtaxation bill since April 2015.
“This approach was painful before the pandemic hit but now risks adding extra financial hardship to those who are forced to dip into their retirement pot to make ends meet.”
Under the pension freedom rules people aged 55+ can freely access their cash. However, any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.
Where the provider does not have the correct tax code for the individual – which is in the majority of cases - withdrawals are taxed using a higher rate emergency tax code, which routinely results in an excessive tax deduction that has to be reclaimed later.
There are three forms - P55, P53Z and P50Z - that allow people to claim back money mid-way through the tax-year.
But Mr Selby warned only those that fill out these forms will be repaid within 30 days, whereas others will have to wait until the end of the tax year.
He said: “To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time.
“While those who took a regular income should have had their tax code adjusted automatically, anyone who didn’t will have been overtaxed.”
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