Recent data has exposed a significant issue with pension taxation, showing that tens of thousands of older adults have successfully reclaimed substantial overpayments from HMRC after being incorrectly charged on their retirement fund withdrawals.
Record-Breaking Refunds
Freedom of Information data obtained by Royal London reveals that approximately 60,000 pension holders received tax refunds during the 2023-24 financial year—a notable 20% increase from the previous year’s 50,000 claimants. The scale of these refunds is striking, with the average repayment reaching £3,342, representing a 9% increase from 2022-23.
Most remarkably, nearly 2,400 individuals received refunds exceeding £10,000, while some cases involved repayments of more than £100,000. The largest 25 refunds averaged an extraordinary £106,900 each.
The Root of the Problem
The taxation issues stem from pension freedoms introduced in 2015, which allow people over 55 to access their defined contribution pension funds with greater flexibility. While savers can typically withdraw 25% tax-free, the remainder faces income tax.
The complication arises from HMRC’s use of “emergency” tax codes for pension withdrawals. The tax authority assumes any withdrawal represents the individual’s regular monthly income for the entire tax year, leading to significant overcharging when people make one-off lump sum withdrawals.
Expert Analysis
Clare Moffat, a pension specialist at Royal London, highlighted the severity of the situation: “The fact that some first-time pension withdrawers were due emergency tax refunds exceeding £100,000 is remarkable. These unexpected tax bills often come as a tremendous shock and can derail people’s retirement planning.”
Since the pension freedoms began in 2015, HMRC has refunded approximately £1.4 billion in overpaid taxes, demonstrating the widespread nature of this issue.
Recent Changes and Future Concerns
HMRC implemented changes in April to automatically update tax codes for new private pension recipients, promising faster refunds. However, Moffat warns that pensioners will still face the initial overcharging.
The situation may deteriorate further due to upcoming inheritance tax changes. From 2027, unused pension funds will become subject to inheritance tax, potentially encouraging more people to make large withdrawals during their lifetime. Since pensions currently offer inheritance tax advantages, this policy shift could drive increased lump-sum withdrawals.
“More people are likely to consider accessing their pension funds while alive to make significant gifts to family members,” Moffat explained. “This trend toward larger withdrawals will probably result in even more emergency tax situations.”
The Ongoing Challenge
Despite HMRC’s procedural improvements, the fundamental problem persists. Pensioners continue to face unexpected tax bills on their retirement savings, and the upcoming inheritance tax changes may exacerbate the situation. The data suggests this issue affects thousands of retirees annually and shows no signs of diminishing.
