Inland Revenue branded ‘belligerent’ after refusing to change the way it taxes money withdrawn from pension pots.
Despite pressure from the industry to change rules, HMRC has said savers withdrawing money from their pension pots will still be hit with so-called ‘emergency tax’.
Under the rules, providers are required to charge emergency tax the first time someone uses pension freedoms to take money out of their retirement savings pot, on the assumption that the same withdrawal will be repeated each month.
It means those who make a single withdrawal in a tax year receive only a twelfth of their usual tax allowances.
As a result, retirees have bee overtaxed by hundreds of millions of pounds since the pension freedoms rules were introduced. But the Office for Tax Simplification has warned that the tax rules around pension freedoms are poorly understood by savers.
Savers withdrew some £10.6 billion from their pensions in the first three months of this year.
HMRC says it has reviewed the process for flexible pension drawdown payments and ‘concluded that any changes at the current time would not significantly improve the tax position for the majority’. It says the current system is ‘the most effective method of deducting tax’ and reduces the risk of people underpaying tax.
Tom Selby, senior analyst at AJ Bell, says: ‘This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years.’
Around £300 million in overpaid tax has been repaid to savers since the pension freedoms were introduced, but anyone who did not apply for a refund will have been left out of pocket.
Selby adds: ‘By continuing to overtax people, HMRC risks pushing savers into financial difficulty and forcing them to withdraw more than they need, which could result in them paying even more tax.
‘HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating.’
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