The data revealed that the average reclaim in Q1 2023 was £3,062, down slightly versus the previous quarter – suggesting more people are accessing smaller retirement pots.
Tom Selby, head of retirement policy at AJ Bell, said it was astonishing that over £1bn has now been reclaimed by savers.
“It is a scandal that government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days,” he said.
Selby explained that these recent figures also suggest the number of people accessing their pensions is on the rise as the cost-of-living crisis continues to eat into people’s living standards.
“In fact, the £48mn repaid to people in January, February and March this year was the second highest figure on record, coming off the back of £45mn that was repaid in the previous quarter,” he said.
Source: AJ Bell analysis of HMRC statistics
“While it is good news that these people have at least received the tax they are owed, depressingly the true overtaxation number will likely be substantially higher.
“In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.”
Selby said those who flexibly access their retirement pot as a result of spiralling inflation “at least have some breathing room” to rebuild their pensions after chancellor Jeremy Hunt hiked the money purchase annual allowance from £4,000 to £10,000.
“This is still a substantial reduction on the standard £60,000 annual allowance available to those who haven’t accessed their pension flexibly, but it at least gives people a fighting chance of getting their retirement plans back on track when this crisis abates,” he said.
FTAdviser understands that where an individual does not apply directly to HMRC for a refund, HMRC will work out their annual tax bill at the end of the tax-year as part of the usual reconciliation exercise.
Some individuals who use pension flexibilities can initially end up overpaying tax. This is because HMRC systems assume that a one-off payment will be a regular payment and, where the scheme doesn’t hold a P45 or similar for the individual, an emergency tax code is applied.
Affected individuals do not have to wait until the end of the tax year to be automatically refunded for any overpaid tax; instead, they can apply to HMRC for immediate tax reclaim (paid within 30 days).
