HM Revenue and Customs has refused to re-think its stance on the tax paid on pension freedoms withdrawals, meaning people could receive one twelfth of their tax allowances.

In a newsletter published on 29 June, HMRC said that any change would not improve the tax position from the “majority” of recipients on a flexible drawdown payment.

Under existing rules, the first time somebody uses pension freedoms to access their pot, providers are required to charge ‘Month 1’ emergency tax, meaning people who make a single withdrawal in a tax year receive significantly less in tax allowances.

HMRC said: “We’ve also been reviewing the current process for flexible pension drawdown payments. We’ve concluded that any changes at the current time would not significantly improve the tax position for the majority of recipients of a flexible drawdown payment when compared to the process currently in place.

“The existing pay as you earn treatment of flexible pension drawdowns remains the most effective method of deducting tax in these cases and it reduces the risk of underpayments of tax arising.”

However, AJ Bell senior analyst, Tom Selby, feels that many who didn’t fill out the forms will be left short changed by the decision, which risks putting people into financial difficulty.

He said: “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. While almost £300 million has been repaid to savers since the pension freedoms were introduced, many more who didn’t fill out the required forms will have been left short-changed for up to a year.

“HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating. The current system was introduced without consultation and leaves millions of savers at risk of being hit with a shock tax bill.”

The government did say that it would continue to monitor the process.

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