Anyone over 55 could be owed over £3,100 each due to tax trap – easy move to reclaim cash
PENSIONERS are being urged to check if they could be owed money by HMRC as new figures show thousands have been overcharged.
Anyone who takes money out of a workplace or personal pension as a lump sum from age 55 could be owed money back.
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You can start taking cash from a defined contribution (DC) scheme or personal pension when you reach 55.
Usually you can take the first 25% of your pension tax-free, and then anything after that is taxed at the usual income tax rate.
But people who take large one-off lump sums from these types of pensions are taxed at an “emergency” higher rate of income tax.
This leaves retirees facing huge sums deducted from their payouts, temporarily leaving them out of pocket.
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New figures from HMRC today show more than £42million was refunded in overpaid pension tax in the first quarter of 2024.
That works out as an average saving of £3,167 per pensioner, although this figure could be higher or lower based on individual circumstances.
More than 13,000 claims were processed in total in the first three months of the year, the data shows.
These figures are a slight drop on the same time a year ago, which could reflect that people were taking larger amounts last winter to cover the cost of living crisis.
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However, experts say the current figures are still “incredibly high” and it is vital pensioners make sure to claim their cash back.
Ian Cook, a chartered financial planner at financial firm Quilter, said this is still a “huge amount of money given it is as a result of the incorrect amount of tax being charged on pension income
“This has caused a significant issue for those who are accessing their pension funds for years and has been exacerbated by the strain that the cost of living crisis has had on people’s finances over the last year or so,” he said.
“The system is desperately in need of an overhaul as, at present, the process is leaving people facing unnecessary emergency tax and adding additional strain at a time when many are still struggling with the cost of living.”
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How to get your cash back
If you’ve withdrawn a large amount from your pension pot, you need to fill in a form to get your cash back as quickly as possible.
You can wait for HMRC to review your tax code at the end of the tax year and it will process a refund, but obviously this means you could be waiting a while.
To get the cash back faster, you can fill in one of three forms: a P55, P53Z or a P50Z which can all be found on the Government’s website.
To avoid having emergency tax deducted in future, try taking smaller amounts out rather than one lump sum.
Mr Cooke explained: “This ensures that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.”
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.