Savers taxed too much on pension cash

AS many as 100,000 savers could be being taxed too much on pension withdrawals, experts warn.

Pensioners could be left out of pocket indefinitely following reforms by former chancellor George Osborne, they said.

The new rules allow retirees to take out cash from their pension pots rather than buy an annuity. They must pay income tax on withdrawals, apart from the first 25 per cent which is tax free. But experts at investment firm AJ Bell say pension firms are deducting too much tax because of a quirk in the tax rules.

By default, the taxman expects savers to keep withdrawing the same amount every month. So if someone withdrew £10,000, they would be treated as if they had an annual income of £120,000.

HM Revenue & Customs then considers them a higher-rate taxpayer and bills them 40p in the pound – even if they are basic-rate taxpayers who should pay 20p per pound.

Someone taking out £10,000, after the tax-free 25 per cent, would therefore pay £3,000 on the remaining £7,500 rather than £1,500.

Savers can get a refund from HMRC, but it is warned many may be unaware they are owed money, and those who do not make a claim may have to wait years before HMRC notice the error and issue a refund.

Tom Selby, of AJ Bell, said: ‘The pension tax rules are a nightmare for ordinary savers. The 100,000 figure is our conservative estimate for the number of people affected.

‘Lower earners may be left out of pocket indefinitely if they fail to notice or if they do not know how to navigate the fiendishly complex maze of forms to get their money back.’

Former pensions minister Baroness Ros Altmann said: ‘It’s ridiculous. A lot of people will struggle to reclaim their money or not know they have overpaid. The system works in favour of the taxman and against the individual pensioner.’

Around 600,000 people have taken advantage of the new rules since they were introduced in 2015, with more than £9billion withdrawn.

But unless they have a P45 form from their former employer, most pension firms use a so-called emergency tax code when someone makes their first withdrawal which means they are taxed at the highest rate.

HMRC said refund claims ‘will be settled within 30 days’. Overpaid tax can be reclaimed by visiting www.gov.uk/claim-tax-refund/you-get-apension or calling 0300 200 3300.

‘The rules are a nightmare’