Savers who use the “pension freedoms” to take one-off withdrawals from their pots are facing delays to HMRC refunds.
Telegraph Money has previously revealed how, because of HMRC rules, one-off withdrawals are taxed as if they are the first of a series of equal payments. Since 2015 over-55s have been able to take lump sums from “defined contribution” pensions whenever they like.
However, until the taxman is alerted to the error, savers can be left thousands of pounds short. HMRC says it issues refunds within 30 days of receiving the correct form, but Telegraph Money has seen examples of people being made to wait up to 52 days.
Bob Mackenzie, 58, makes an annual withdrawal from his Standard Life pension. In June he took £34,000 and, as he expected, received £22,115. He filed in the requisite form, P55, to reclaim the £5,187 he had been overtaxed. He eventually received the money on Aug 3, 22 days late.
Call centre staff told him there was a “backlog” but a spokesman denied this. He did admit that in some cases further details were needed before a refund could be processed.
The over-taxing problem is caused by how HMRC applies a “Month 1” code to withdrawals. This is how the “pay as you earn” system works – it assumes a regular monthly income and applies a tax code accordingly.
So a single £10,000 withdrawal is taxed as if the individual will earn £120,000 in the tax year.
HMRC only partially takes account of an individual’s “personal allowance”, the £11,500 you can earn a year without paying income tax.
In one case previously highlighted, a saver was over-taxed £15,000 by HMRC.
If you think you’ve been overcharged you must send one of three forms to the tax office.
This is either the “P55 form” because he is only taking a partial cash withdrawal. If taking an entire pension as cash, you must either fill in “P50Z” (if you’ve stopped working) or “P53Z” (if you’re still receiving earned or other income). You can fill out the relevant form online so long as you have a “Government Gateway” account, or by post.
If your pension provider has an up-to-date tax code from HMRC, or a P45 from the current tax year, from the employer you retired from, you don’t have to do anything.