HMRC pays out £600 million in pension tax refunds
11th May 2020
Since 2015, the pension rules have given people a lot more freedom over their pension pots. Basically, instead of locking your savings up until retirement, you’re able to start pulling your cash out from the age of 55. So far, close to 1.5 million people have used these “flexible drawdown” options, getting earlier access to over £35 billion of their pension savings.
There’s a pretty big fly in the ointment, though – and the buzz is getting round about it. New information from HMRC looks to be showing that people getting flexible access to their pensions are being stung by the taxman to the tune of over £600 million.
Here’s what’s happening. More and more people are taking advantage of the pension rules to get access to their pots earlier in life. Some are grabbing a large lump sum all in one go, while others are opting for smaller amounts as and when they need them. When you take your cash out, you get a 25% tax break from HMRC – meaning a quarter of what you draw out isn’t taxed, but the rest is. The tax gets taken out at your normal rate by your pension company, before you get your money.
The trouble is that your pension company won’t necessarily know what your “normal rate” is. Basically, if you don’t have a P45 to show them, there’s a good chance you’ll be hit with an emergency rate of tax, based on an expectation that you’ll be drawing out the same lump sum every month. Obviously, since you usually don’t get a P45 unless you’re leaving a job, a lot of people drawing cash from their pensions don’t have one. Equally, not everyone taking cash out of their pots is planning to do it regularly. A lot of the time, it’s simply a one-off. The extra tax being taken out is putting a nasty and unnecessary strain on many people’s pension savings.
Luckily, there’s a way to balance the scales – although it does require a little paperwork. Generally, whenever HMRC takes too big a bite out of anyone’s income, they provide a way to settle up. In this case, there are 3 basic forms you can use to get a refund on the overpaid tax. The form you need depends on your situation.
If you’re draining your entire pension pot in one go, you’ll use:
- P53Z if you’ve got any other taxable income (earnings, state benefits, etc.)
- P50Z if you’ve got no other taxable cash coming in.
- P55 to claim a tax refund if you're only taking out a portion of your overall pension pot.
You can find all the digital documents over on the HMRC website, either to fill in online or to print out and post. Either way, you’re supposed to get your refund inside about 30 days.
So far, HMRC has already refunded £600 million to pension savers who’ve used the revised rules to get early access to their cash. £166 million of that was in the last tax year alone. Average refunds for just the first three months of 2020 came to £3,141 apiece to over 10,000 people.
Obviously, we’re not going to sit here and lecture you on what to do with your pension savings. There’s one thing we're always very clear on, though. Whatever you do, never leave cash in the taxman’s pocket that should be in yours. Don’t let the forms and regulations scare you off, seek professional advice if you’re not sure of your footing and get in touch with us if you need help. We’re the UK’s leading tax experts, so when it comes to HMRC tax refunds you’re always better off with RIFT.