Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The overpaid pension tax saga continues to drag on. In just three months, HMRC has repaid a whopping £48.7m to people who paid too much tax for simply accessing their pension. With an average refund of around £3,800, these refunds amount to a significant chunk of change. The problem hits people who are taking a lump sum from their pension for the first time. They get taxed on what is known as a “month 1” basis, which means it’s treated as though the same amount will come out every month. This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans. The money can be reclaimed. HMRC processed close to 13,000 forms between the beginning of April and end of June, but it’s an admin headache that people can well do without. Ten years on from the advent of Freedom and Choice it’s a process that should have been consigned to history. There are things you can do to mitigate it. For instance, you could make your first pension withdrawal a relatively small one. However, if you were looking to take a lump sum to fund travel or home renovations, for instance, you will need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans. If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund. Otherwise, you can wait until the end of tax year.”
David Brooks, Head of Policy at Broadstone, said: “While HMRC’s stats show an alarming £48.7m had to be repaid to pension dippers from tax overpayments in Q2 2025, it is pleasing that the system will soon be changing. Improvements to the framework should mean that people accessing their pension cash are moved onto the correct tax code sooner, minimising or eliminating the need to claw back overpayments. While this undoubtedly enhances the system, it leaves a dissatisfactory outcome for those that will still need to reclaim overpaid tax.”
HMRC latest pension flexibility data
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