On the go: The government faces growing pressure to review ‘emergency tax’ treatment of pension freedoms withdrawals, after it was revealed that a staggering £372.5m has now been reclaimed by pension savers since the freedoms were launched in April 2015.
Indeed, more than £38m was reclaimed by savers overtaxed on their pension freedoms withdrawals in Q3 2018 alone, the highest figure on record.
Savers are able to reclaim money deducted as the result of HM Revenue & Customs' emergency tax treatment, but experts have said the majority of savers will not fill out the necessary forms.
The Treasury's £5.5billion pension freedoms tax bonanza
Year | Tax raised (£bn) |
2015-16 | 1.5 |
2016-17 | 1.1 |
2017-18 | 1.6** |
2018-19 | 1.3** |
**Tax take for 2017-18 and 2018-19 based on latest estimates
Commenting, Steve Webb, director of policy at Royal London said: “HMRC is clearly out of control. It operates a system of ‘tax first, ask questions later’, presumably so that the Government can enjoy some extra interest until the money is claimed back."
"It is time to speak up for ordinary citizens who are forced to pay excessive amounts of tax and then go through the hassle of claiming it back. This is a system built around the needs of the Treasury and the bureaucracy, not one which puts people first,” he added.
Tom Selby, senior analyst at AJ Bell, added: “For those who access their pension for specific purposes such as paying down debt or funding care for an elderly relative, receiving potentially thousands of pounds less than they expected could present a very real financial challenge.
“We do not pretend this is an easy problem with easy solutions, but the government cannot simply ignore the issue either. Policymakers need to seriously consider whether the current approach is the right one and engage with the industry to consider alternatives that don’t unfairly punish savers who access their retirement fund.”
The pension freedoms have proved a real money spinner for HM Treasury. The Office for Budget Responsibility’s fiscal outlook, published alongside Monday’s Budget, revealed a significant upgrade in the estimated pension freedoms tax take for 2018-19. Its report says the Treasury will net an extra £400m as a result of people paying tax on their retirement withdrawals.
Based on the Spring Budget 2017 costings – which factored in a tax take of £900m in 2018-19 – this suggests a near 50 per cent increase in revenue raised from the policy this year to £1.3bn, taking the total tax generated by the policy to £5.5bn.
