Pension tax reclaims processing slows amid Covid-19; per person claim values hit record high

The number of pension tax reclaim forms processed in Q2 2020 fell by almost 10,000 compared to Q2 2019, with just 7,649 forms processed during the period, according to HMRC data.

This is also a fall compared to Q1 2020, when over 10,000 pension tax reclaim forms were processed.

The amount repaid to overtaxed savers between April and July also fell by £20m compared to Q2 2019, with £27m repaid in Q2 2020.

However, the average per person reclaim hit a record high of £3,560 during Q2, £845 higher than the same period in 2019.

More broadly, the total amount reclaimed by people overtaxed on pension freedom withdrawals has now reached £627m.

Further HMRC figures released today also showed a broader decline in pension withdrawal activity, with the number of withdrawals also much lower compared to both year-on-year data and Q1 2020.

Commenting on the latest HMRC tax reclaim figures, AJ Bell senior analyst, Tom Selby, argued that “hard-working” savers continue to be “unfairly overtaxed” when flexibly accessing their retirement pot.

He explained that the overtaxation figures for this period were “always likely to be affected by Covid-19”, with “far fewer” claims processed than usual, speculating that this may be because HMRC was “stretched to breaking point” when responding to the immediate challenges posed by the pandemic.

He emphasised however, that it is “clearly not ideal” that thousands fewer people have made a reclaim for the tax they are owed at a time when many are already facing “huge financial pressures” amid lockdown.

Furthermore, Selby highlighted the increase in the average per person reclaim hitting a record high as evidence that the pension freedoms overtaxation problem "appears to be getting worse rather than better".

He added: “We are over five years into the pension freedoms and HMRC’s approach to the taxation of withdrawals – which was never formally consulted on – still hasn’t been officially reviewed.

"This affects hundreds of thousands of people, with the obvious risk that those who fail to make a reclaim are left short of cash when they need it most.

“Given the treasury is already reviewing pension tax administration in relation to net pay pension schemes, it would make sense to review HMRC’s approach to the taxation of pension freedoms withdrawals alongside this.”

Indeed, the treasury announced a call for evidence on pensions tax relief administration earlier this month, following industry and stakeholder concerns over the net pay anomaly.

The Work and Pensions Committee also recently announced a broader inquiry into pension freedoms and the impact of long term pension savings.

Industry experts have previously warned that the over-taxation of pension withdrawals would be "more penal" during the lockdown period, calling on the government to rethink the tax process as a "matter of urgency".

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