Steve Webb – angry and rightly so

More than half a million people have now been forced to reclaim tax they never owed after dipping into their pensions, with former pensions minister Steve Webb saying the system is “designed for the convenience of the tax office, not the taxpayer.”

New HMRC figures released today show that over 502,000 official claims have been made by savers hit by emergency tax codes when accessing their defined contribution pensions and the system behind it remains unchanged nearly a decade after Pension Freedoms were introduced.

Webb has blasted HMRC for failing to fix what he calls a predictable and avoidable problem, with nearly £1.5 billion now repaid to pension savers since 2015.

He says: “How longer will all of this go on?  Ten years on from the introduction of Pension Freedoms, tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC. “

That’s great stuff from Steve Webb and well written by Corporate Adviser’s Muna Abdi

The FCA’s exploration into Financial Lives which I reported on earlier this year told us that a high proportion of people who have DC pots want to take the money back in chunks rather than regular income.

 HMRC often applies an emergency tax code, assuming the withdrawal will be repeated monthly, which leads to far too much tax being taken. While the money is eventually paid back, it can take months unless people know to claim it back themselves using one of three specific forms.

Webb says:

“Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of ‘business as usual’.  It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions”.

Corporate Adviser concludes

The system has faced years of criticism but remains unchanged and Webb says the government should finally act to make it fairer and easier for people to access their pensions.

Do we really think we have a DC system that works? We don’t and we won’t till we return to a pension system that pays pensions by default , not the dreadful annuities we were glad to be rid of in 2014, but the pensions paid by the state as state pension , to those who are in the public sector and the lucky ones in the private sector who get them mostly as legacy.

Those at HMRC and the Treasury and DWP can smile  to each other, they will not have issues with taxation when they take civil service pensions (which they still accrue).

I have been dealing with HMRC in Croydon trying to return money owed to the lowest earners paying into pensions who get no tax relief (despite it being seen as an incentive not a perk).

It would seem that HMRC are as slow to sort out tax for those drawing their pots in chunks as they are to refund the “Low earners pension payment” (as this further delayed repayment will be known).

The new regime of default DC pensions that will arrive with the new Pension Schemes Bill/Act will not sort out the problem that Steve Webb comments on. It will just give the HMRC and Treasury a reason to do nothing. After all, if you opt-out of the favoured default, you really are on your own – aren’t you!