Each quarter, HM Revenue & Customs publishes statistics on what has been happening since the pension freedoms came into force. While currently lacking context as they were optional last year, some new figures published this quarter are very interesting.
They relate to the amount of tax that has been overpaid by members who have flexibly accessed their benefits and, more importantly, completed the appropriate forms to reclaim this tax during the tax year. From 1 July to 30 September 11,982 forms were processed, resulting in £29.6m of tax payments being repaid.
When the changes to the way in which providers had to deal with PAYE income payments to members flexibly accessing their benefits were announced, advisers were concerned clients would be out of pocket for months on end as the provider would be forced to use an emergency tax code if no P45 was available.
This assumes the payment would be regular for the remainder of the year, resulting in excess tax being paid by a significant number of members at higher or even additional rates. This is not an issue if the payments are regular but the provider still had to assume this even if they knew it would be a single payment and even if it extinguished the fund.
Before pension freedoms, the provider could make an assumption if the member was a basic or higher rate taxpayer. It does make sense that it is easier for HMRC to pay the tax back to the member rather than try and recoup additional tax at the end of the year. But looking at the figures for a single quarter, many have been disadvantaged while HMRC has been sitting on their funds.
Sixty per cent of the reclaims are from those that have fully extinguished their fund with the payment and, of those, 1,514 had no other income to rely on. Those 1,514 are likely to be those most in need of the cash as soon as possible because of their lack of other income.
We also do not have any figures (and are unlikely to get them) of those who took one look at the forms and decided they were far too complicated and would just wait until HMRC sent them a cheque the following year.
The remaining 40 per cent were part payments from their scheme, so it is unlikely they really needed the cash because they would have had the option to either take a larger single payment or a few regular payments to balance it out.
The average reclaim is in excess of £2,000 but there will be some who have paid significantly more than that. Now they have started providing figures the risk of underpaid tax should be reassessed. The system may well need a rethink to avoid those in need having to wait months for their full pension fund.
Claire Trott is head of pensions strategy at Technical Connection