HMRC refunded £115.6m in overpaid pension tax in 2020/21 – how to reclaim your payments

Budget 2021: Sunak announces pension lifetime allowance freeze

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HMRC released pension withdrawal data today which showed throughout January, February and March 2021, £2.6 billion was withdrawn from pensions flexibly. This was a six percent increase year-on-year from £2.5 billion withdrawn during the same period in 2020.

Following the release, Quilter examined the data and laid out the following insight for Q1 of 2021:

  • Number of payments: 911,000
  • Number of individuals: 383,000
  • Total value of payments: £2,600,000,000
  • Average value per payment: £2,854
  • Average number of payments per individual: 2.379
  • Average value paid to individuals: £6,789

Ian Browne, a pensions expert at Quilter, reflected on this and focused on tax consequences for both pensioners and HMRC.

He said: “The latest pension income statistics show a stable trend as more and more people become familiar with pension freedoms and the possibilities they have with their cash.

“There were fears as the pandemic took root that 2021 was going to be a difficult year and we would see significant spikes in pension access.

“While the number of payments and total value has risen, it is nothing out of the ordinary and clearly the government support schemes are doing their job and helping to prevent a mass exodus of savings that we might otherwise have seen by now.

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“The true economic impact of Covid-19 still remains to be seen, however. Unemployment has only ticked up slightly, and with furlough in place until at least September we still face an unknown and uncertain future despite the success of the vaccine rollout.

“This pandemic has changed our financial planning habits for good. There are a number of people who are now newly motivated to plan for their retirement, while others have clearly felt the need or desire to retire early. As the number of people accessing their pension reaches record highs, it brings into focus more the quirks of the pension system that need ironing out.

“The Money Purchase Annual Allowance is arguably preventing a cohort from accessing their pensions flexibly but wishing to maintain some level of employment.

“The reduction in your annual allowance after taking just 1p from your pension could materially impact someone looking for short-term financial relief from their pension or those who want to enjoy semi-retirement. The pandemic was the perfect opportunity to assess the use of these policies, but it appears the government remains stubborn at keeping it in.

“The stats also reveal that HMRC has had to pay back £23,183,421 in tax in Q1 this year as a result of the incorrect amount being taken from pension income.

“This highlights the importance of getting financial advice before touching your pension. The onus will be on the individual to reclaim this tax and they should not expect HMRC to be proactive in handling the cash back.

“Working with someone who knows and understands the system and can plan your financial affairs thoroughly with you will reduce the risk of lost income being handed to the tax authorities, or if it is taken then helping you reclaim it speedily and effectively.”

In looking at the whole year, it was revealed that HMRC repaid £115.6million in pension tax during 2020/21.

Sean McCann, a Chartered financial planner from NFU Mutual, commented on this and provided insight on what people can do to reclaim overpaid tax: “When people over 55 tap into the pensions and withdraw taxable amounts, often too much tax is deducted.

“This happens when their pension provider doesn’t have a tax code for them and is forced to use an emergency tax code. This can mean they pay 40 percent or even 45 percent tax on a significant part of the amount withdrawn.

“HMRC will eventually correct the overpayment at the end of the tax year, but this can take a significant amount of time and many people are understandably keen to get the money they’re owed repaid.

“If you think you may have overpaid tax on the money you’ve taken out of your pension you can make a claim on HMRC’s website.”

Sean concluded by detailing consumers can use a P55 form to reclaim tax if they haven’t fully cashed in their pension, or a P53Z form if a pension has been cashed in in full.

Both of these forms can be found on the Government’s website.

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