The number of over-55s who had to reclaim tax after taking money from their pension hit a record high in June.
More than 17,000 savers reclaimed tax worth £46 million in the three months between April and June 2019, according to quarterly figures from HMRC.
Around 14,000 people over the age of 55 claimed back £29m in the same quarter last year, the official statistics showed.
The year-on-year increase in the number of savers reclaiming tax that they are owed in the second quarter reflects a recurring trend.
Since pension freedoms were extended in April 2015, more than 170,000 people have been overtaxed to the tune of £480m.
“Thousands of people every month are having to fill in complex paperwork to recover tax they should never have had to pay,” said Steve Webb.
“It’s a scandal that people who legitimately access their own money, using freedoms given to them by the government, are being overtaxed by HMRC.
“Nearly half-a-billion pounds have had to be prised out of HMRC’s hands [since 2015/16] and returned to its rightful owner.”
It is easy to understand why the former pensions minister, who is the director of policy at mutual insurer Royal London, is on the warpath.
What causes overtaxation?
Anyone over the age of 55 can withdraw 25% of their pension pot without paying tax, with any amount over that being taxed at their marginal rate.
When a lump sum is withdrawn from a defined contribution pension, the pension provider applies a temporary tax rate that can put savers into a higher tax band.
As a result, thousands of people have been overtaxed and will need to reclaim their money from HMRC.
In a separate tax trap, thousands of over-55s could receive unexpected tax bills after triggering the money purchase annual allowance (MPAA).
The MPAA reduces the annual pension allowance from £40,000 to just £4,000, and is typically triggered when you take your entire pension pot as a lump sum.
Other actions can trigger the MPAA, which makes it important to seek professional advice before you access your retirement savings and take steps to avoid being overtaxed.
Claiming a tax refund
The matter of reclaiming excess tax after flexibly accessing your pension is complicated, as you have to complete one of three different forms.
If you have only partially accessed your retirement savings and will not be taking regular payments, you can reclaim any overpaid tax by completing a P55 form.
You will need your Government Gateway user ID to log in and must either complete the form on-screen, or download it and fill it in by hand before posting it to HMRC.
The P55 form is also the one to consider if you have been overtaxed and your pension body has been unable to issue a tax refund.
Individuals who have withdrawn all of their pension pot in one go need to use either form P50Z or form P53Z.
The P50Z form comes into play if you have emptied your whole pension and have no other income in the tax year.
The P53Z form is for people who have withdrawn their entire pension pot and have another source of taxable income.
Speak to us about reclaiming tax.