Warning for anyone aged over 55 who could be owed £3,000 tax back – are you one of them?
BRITS over the age of 55 could be up to owed up to £3,000 from the government .
That’s because anyone accessing their retirement savings from this age could be overpaying tax.
People who access one-off lump sums from their pension are taxed as if that will be their monthly income – meaning they often pay far too much.
This applies to a workplace or personal pension, which is different to the government-paid state pension.
The latest official figures show that between January and March this year HMRC processed 15,800 tax refund claims.
The total amount repaid during the three month period was £48.5million.
This takes the average payment to £3,061 per person – but the exact amount you can get back if you overpay depends on how much money you took from your pension, what other income you have (if any) and your tax rate.
In fact since pension freedoms were introduced in 2015 – giving people more flexible access to their savings – more than £1billion has been overpaid.
Steve Webb, Partner at LCP said: “We are not talking about small sums, with over £1 billion being paid back by HMRC so far.
“Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury”.
While Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said it is “shocking that this issue has not been dealt with”.
“It adds unnecessary confusion with thousands of people every quarter having to reclaim their own money after being overtaxed – it risks undermining people’s retirement plans and leaving them short of cash in the short-term”, she added.
Flexible pension access lets you draw down a portion of your retirement savings – while leaving the rest to continue gaining interest.
Most people can take up to a quarter of their savings as a tax-free lump sum, but anything over that amount will be taxed.
If you withdraw a big amount as a one off, you would be put on an emergency tax code and be taxed as though that will be your regular income throughout the year.
For example, if you took £30,000 as taxable income, you could be taxed as if you were taking 12 times this amount – £360,000 – in the financial year.
The Sun has contacted HMRC for comment.
How can I find out if I am due a refund?
You could be owed a refund if you’ve taken a lump sum out of your pension recently.
If it was the first time you’ve drawn down cash from your pension pot and if you took more than 25%, it is likely that HMRC owes you money.
To claim the money back, go to the government website where you can fill in a form online or print one out to return by post.
There are different forms depending on your situation.
If you have withdrawn all of your pension, and you’ve stopped working, you should fill in a P50Z form.
People who are still working but have emptied their pension pot should return a P53Z form.
But if you’ve just taken out a chunk, you need to submit a P55 form.
It could take up to six weeks for your money to be returned.
If you don’t do this, you should get your money back automatically anyway – but you will have to wait until the end of the tax year.
Andrew Tully, technical director at Canada Life, said making a small withdrawal in the first instance could stop people being put on an emergency tax code.
“A good tip for those customers making a pension withdrawal for the first time, is to initiate a small withdrawal of say £100″, he said.
“That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals.
“That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place.”
Meanwhile, millions of households have just three months to carry out a check and claim tens of thousands of pounds.
Plus, state pension claimants could be caught by a surprise tax trap following the recent payment increases.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk