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Anyone over 55 could be owed more than £3,800 each due to tax trap – easy move to reclaim cash
PENSIONERS are being urged to check if they could be owed thousands from HMRC due to a tax trap.
Anyone who takes money out of their workplace or personal pension as a lump sum from the age of 55 could be owed more than £3,800.
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If you have a defined contribution pension or a personal pension, you can start taking out cash when you turn 55.
You're typically allowed to take the first 25% tax-free, and everything after that is taxed at the usual income tax rate.
However, if you decide to take a large lump-sum from your pension, you'll automatically be put on an "emergency" higher tax rate.
Hargreaves Lansdown head of retirement analysis Helen Morrisey says: "The problem hits people who are taking a lump sum from their pension for the first time.
"They get taxed on what is known as a 'month 1' basis, which means it's treated as though the same amount will come out every month."
The rule can leave retirees facing huge sums being deducted from their pension money, derailing people's retirement plans and leaving them temporarily out of pocket.
New figures published today reveal HMRC repaid £48.7million between April and June this year to people who overpaid tax on their pension.
Ms Morrissey added: "With an average refund of around £3,800, these refunds amount to a significant chunk of change."
However, HMRC rolled out a new system this month, aimed at stopping retirees from being wrongly whacked with a sky-high emergency tax bill when making a withdrawal.
It ended the long-running issue caused by emergency tax codes applied to pension withdrawals under the pension freedoms introduced in 2015.
What to do if you've overpaid
If you think you've overpaid tax, you'll need to fill out one of three forms so HMRC can process your refund.
This is a P55, P53Z or a P50Z form, which can all be found on the Government's website.
Otherwise, you'll have to wait for HMRC to review your tax code at the end of the tax year, but this could leave you waiting a lot longer to get back the money you're owed.
Which form you need to fill out will depend on how you have accessed your retirement pot:
If you've emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
If you've emptied your pot by flexibly accessing your pension and aren't working or receiving benefits, you should fill out form P50Z,
If you've only flexibly accessed part of your pension pot then use form P55.
HMRC says it aims to process refunds within 30 days.
HMRC processed almost 13,000 forms between the April and June this year.
Pension experts have been calling on the government to overhaul the system to avoid pensioners having to fill in forms to claw back their overpaid tax.
"It's an admin headache that people can well do without," Ms Morrissey said.
Former pensions minister Sir Steve Webb said: 'Tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC.
"This is a system designed for the convenience of the tax office, not the taxpayer.
"Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of 'business as usual'.
"It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions'.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%.
Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
