The emergency tax will continue to be levied on those that wish to withdraw income from their pensions by HM Revenue & Customs (HMRC) despite criticism from the pensions industry.
HMRC assumes that any withdrawal from a pension under the new pensions freedoms rules will be repeated on a monthly basis over the course of the year and charges accordingly.
This means that a single withdrawal will only have 1/12th of the usual annual allowance applied to it. A lack of understanding of the new rules has been highlighted by the Office for Tax Simplification, with the resulting over taxation of retirees to the tune of hundreds of millions of pounds having resulted already.
According to HMRC, they have already reviewed the current system and have concluded that any changes at the current time would not significantly improve the tax position for the majority". The current method is designed to reduce the risk of tax underpayment.
Tom Selby of AJ Bell says: "This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years."
Those who have overpaid and not applied for a refund will have been left out of pocket, with £300 million in overpaid tax having been collected due to the new policy.
Mr Selby continues: "By continuing to overtax people, HMRC risks pushing savers into financial difficulty and forcing them to withdraw more than they need, which could result in them paying even more tax.
‘HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating".
If you think that you may have overpaid, see HMRC's site for further information.
Your Financial Adviser can construct a financial plan for you that will enable you to meet your financial goals.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Over-taxing to continue on ad hoc withdrawals from pension pots