Hundreds of thousands of pension savers have been refunded £666.4m in tax since the pension freedoms were introduced in 2015, according to the latest data published by HMRC.
The pension rules introduced five years ago aimed to give people more control over their retirement income, allowing pension savers who have reached the age of 55 to withdraw money from their pots whenever they like.
Since 2015, the total value of flexible withdrawals from pensions has exceeded £37bn. But those who withdraw for the first time are in danger of being charged excessive amounts of tax at an 'emergency rate', so could be entitled to a refund from HMRC.
Here, Which? explains why HMRC is overcharging pension tax and how you can claim a refund if you've been affected.
Under the pension freedoms rules, savers who have reached the age of 55 are no longer required to purchase an annuity and can withdraw from their pension in small amounts or as a lump sum.
Some £2.3bn was withdrawn in the three months to September 2020, down 2% year-on-year from the £2.4bn withdrawn over the same period last year.
The average amount withdrawn per person throughout July, August and September 2020 was £6,700. This is down 7% from £7,200 compared with the same period in 2019.
However, while the amount of money people are withdrawing has fallen, the number of people withdrawing has increased.
Some 347,000 individuals withdraw from pensions flexibly between July and September 2020, a 6% increase compared with the 327,000 who unlocked their savings during the same period in 2019.
There was a 2% increase in the number of individuals withdrawing between July and September, compared with the previous three months, which is contrary to normal seasonal patterns.
Since 2015, the number of people making withdrawals typically peaks in April (the beginning of the tax year), May and June, before dropping in the following three months. HMRC says this change in behaviour may be down to the impact of COVID-19.
Since reporting became mandatory in April 2016, the average amount people have withdrawn has fallen steadily and consistently, with peaks in April, May and June of each year becoming a noticeable trend. However, there was no peak in April, May and June 2020, which may also be linked to the impact of COVID-19, HMRC says.
The chart below shows the number of individuals who have withdrawn their pension and the total value of payments since April 2015.
You can also take a lump sum from a pension drawdown plan. If you do this, 25% of your total pension savings are tax-free and any subsequent withdrawals are subject to income tax.
Your pension company collects the tax on your behalf, so the lump sum you get is paid net of tax. However, many people overpay tax the first time they withdraw from their pension.
This is because your provider may not know what your tax code is or details of your other income if you have any.
This means you'll be taxed as though the lump sum you're withdrawing will be repeated every month. For instance, a £10,000 withdrawal could see you being taxed as though your annual income is £120,000. If this goes unnoticed, it can make an unnecessary dent in your overall pension pot.
HMRC has paid back £39.4m in overpaid pension tax to people between July and September, up from £27m between April and the end of June, and £32m between January and March 2020.
However, these figures relate to the amounts repaid as a result of claims being submitted on either a P55, P53Z or P50Z forms (more on these below) and do not include repayments through coding adjustments as a result of the end of year reconciliation.
There were 12,051 pension tax reclaim forms processed between July and September compared with 7,649 between April and June, and 10,000 between January and March 2020.
Helen Morrissey, pension specialist at Royal London, says: 'The pension freedoms have been with us for several years now and it's absurd that this overly complex system remains in place.'
She adds: 'The last thing [people] need at such a difficult time is to be over-taxed and then have to reclaim it - it's a system in urgent need of reform.'
If you've taken money out of your pension, it's important to check that you haven't paid more than you should and take action to reclaim your money.
If you've overpaid tax, you'll need to fill out one of three claims forms:
A should be completed if you've withdrawn all of your pension, but have no other taxable income. If you don't want to use the government's online service, you can fill out a form on screen, print and post it to HMRC, or print off and fill in a form by hand. HMRC says you should receive a refund of your overpaid tax within 30 days.
Pension drawdown allows you to access your pension pot to provide you with a regular income.
The income you get varies on your fund's investment performance and, unlike an annuity, it isn't guaranteed for life.
However, it could be suitable if you want to have more control over how your money is invested. It may also benefit you if you want the flexibility of taking out different amounts during the year and want to manage your tax liability. However, there are other things you need to take into consideration before jumping the gun and withdrawing your money.
Especially now, as the coronavirus pandemic has led to large losses in the , which your pensions should be invested in. If you want a guaranteed income for life, are concerned about running out of money or don't want to expose your pension pot to investment risk, income drawdown may not be for you.
If you do wish to withdraw, make sure you don't make any rushed decisions which could affect the longevity of your savings. It's important that you have enough to last the rest of your life.