"It cannot be right that HMRC can knowingly overtax people to the tune of £100m per year and expect thousands of individuals to know which form to fill in to get their money back."
Under current rules, when individuals withdraw a lump sum from their pension they are usually taxed on an ‘emergency’ tax code which results in a substantial over-payment.
Former pensions minister and current Director of Policy at Royal London, Steve Webb, says the way in which pension withdrawals are taxed "is little short of a scandal".
HMRC admitted that in the first three months of this financial year they had to pay out over 10,000 refunds worth over £26m.
In its written submission to the ongoing Work and Pensions Committee inquiry on Pension Freedoms, Royal London is calling on HMRC to take only standard rate tax for lump sum withdrawals, collecting any extra tax due through the usual end-year tax return process.
Royal London has also highlighted several areas where more could be done on the pension freedoms reforms, in addition to the tax changes.
It wants to see earlier contact with pension savers, rather than a ‘wake-up’ pack six months before retirement, as well as enhanced access to advice, including more support for employers who offer workplace advice and a piloting of vouchers for financial advice.
Royal London also wants the government to give more powers to pension schemes and providers to block pension transfers where they are concerned about the risk of ‘scams’.
Finally, it has asked the government for a "firm commitment" that it will be legislating to require all pension schemes and pension providers to supply data to the proposed pension dashboard.
Steve Webb, Director of Policy at Royal London, said: "The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC can knowingly overtax people to the tune of £100m per year and expect thousands of individuals to know which form to fill in to get their money back. Too often, HMRC’s approach is to tax first and ask questions later, and this must stop.
"Many thousands of people have enjoyed the benefits of pension freedoms and for most people the reforms have worked well. The government now needs to build on this success and make sure more people get the advice and guidance they need to make best use of these freedoms. They also need to do more to support pension providers who are seeking to protect savers against the activities of scammers."
