HMRC are overcharging people making use of the new rules to draw down cash from pensions. Following the changes, there are three options to draw down money from a pension scheme:
- The first is an annuity, where you take a lifetime income based on annuity rates to use up, usually all, or part of the fund. Given the current annuity rates, these are generally not favourable.
- A second option is a drawdown plan, where you draw money from the pension, but you stay invested.
- A third option is to take single ad hoc withdrawals, and it is this third type of withdrawal which is causing the problems.
The pensions freedom legislation was brought in in quite a rush and took everybody by surprise, including HMRC. Because of the lack of consultation, HMRC decided to tax the single withdrawals as if they would have been monthly withdrawals i.e. that you would be drawing down an amount equal to twelve times the amount you have drawn out, and they tax each payment on that basis. For many people, they are having tax deducted at rates much higher than they have ever paid during their lifetime.
There is nothing much you can do about this, as it is the law, but you are entitled to get the tax back where it has been over deducted. There are essentially three ways of doing this, using three forms.
- Firstly, there is the P53Z, which is to be used where you have cashed in your entire pension, but you still have other income.
- The form P50Z, is for where you have cashed in all your pension, but you have no other income.
- Lastly, the P555, is where you cashed in part of your pension but do not intend to take out any further withdrawals.
Over half a million people have taken such payments and HMRC have confirmed that they have refunded £262,000,000 in respect of 107,000 such withdrawals. It would seem therefore that there are approximately 400,000 withdrawals for which a refund has not been claimed, and probably there is about one billion pounds of tax to be refunded.
If you would like some help with this, or indeed, you would like someone to deal with the reclaim for you, please get in touch.