HM Revenue and Customs could over-tax pension withdrawals more severely during lockdown, former pensions minister Steve Webb warns.

According to research by pensions consultancy LCP, the ‘over-taxation’ is set to get more draconian during the current crisis.

Since the introduction of pension freedoms in 2015, individuals aged 55 or over have been able to take money flexibly from their pension pot rather than use the pot to buy a regular income.

HMRC statistics show roughly a third of a million people took money out of their pension in this way in the first quarter of 2020.

Many of these withdrawals will be by people in retirement taking relatively modest amounts on a regular basis where over-taxation is unlikely to be an issue.

But for those who first take a one-off sum from a pension pot, the excess tax can run into thousands of pounds.

HMRC has had to repay more than £600m in over-paid tax on pension withdrawals since 2015.

In Q1 2020 alone, HMRC processed over 10,000 claims from people who had reclaimed the overpaid tax as soon as it was deducted, and the taxpayers received back an average of over £3,000 each.

LCP points out this only reflects people who actively claimed a refund, and no figures are available on the numbers who do not claim at the time.

Its analysis suggests the less an individual has in other taxable income, the more that individual will be over-taxed on withdrawal.

Webb, now a partner at LCP says: “This system has to change. While it is far from ideal if individuals feel they have no choice but to access their pensions to support them through the current crisis, the very least the authorities should do is allow fairer tax deductions upfront on them.

“The system of ‘emergency tax’ on one-off withdrawals from pension pots has already been widely criticised and it now looks unfit for purpose in the current crisis. HMRC should think again as a matter of urgency.”

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