Pension warning as HMRC error leaves thousands of retirees overtaxed simply for 'accessing their own savings'

Between July and September 2025, more than 13,700 people reclaimed money that HM Revenue & Customs (HMRC) had incorrectly deducted from their pension withdrawals.

This was an 11 per cent increase compared to the same period last year, when 12,331 savers received refunds.

The average repayment was £3,539, meaning many retirees are losing thousands of pounds to tax errors when simply trying to access their own savings. Despite government reforms aimed at making pension withdrawals easier, the problem continues to grow.

Jon Greer, head of retirement policy at Quilter, described the situation as "extraordinary" given that pension freedoms were introduced a decade ago.

He said: "Thousands of people are still being overtaxed every quarter simply for accessing their own savings. The system continues to work against the very flexibility it was designed to promote.

“Although HMRC has made changes to speed up repayments, these figures show the underlying problem persists. The PAYE system was built for regular employment income, not one-off pension withdrawals, and it continues to cause unnecessary complexity for retirees"

Tom Selby, director of public policy at AJ Bell, revealed that total refunds have now exceeded £1.5billion since pension freedoms began.

He warned that official figures represent merely "the tip of the iceberg" as they only capture those who complete reclaim forms.

The rising state pension is now eating into more of retirees’ personal allowance, creating new tax headaches for older savers.

With the allowance frozen and the state pension increasing each year, growing numbers of pensioners are being pushed into paying tax when they make flexible withdrawals from their retirement pots.

"When they make flexible withdrawals to top up their income, a larger portion is now taxable, compounding the frustration when over-deductions occur," Mr Greer noted.

Current Budget uncertainty has intensified the problem, with speculation about potential changes to pension tax relief prompting rushed decisions.

Mr Greer warned: "Those decisions, often driven by fear of future rule changes, risk damaging well laid future financial plans," emphasising the importance of stability and clear communication in maintaining confidence in the pension system.

The government has implemented some improvements, with changes from April 2025 enabling faster transitions from emergency tax codes for those drawing regular pension income. However, these modifications fail to address the core issue affecting single withdrawals.

"HMRC has moved to offer some respite to those who take a regular drawdown income," Mr Selby acknowledged, but stressed that "that doesn't help those taking a one-off withdrawal, who will continue to be overtaxed."

Future complications loom with proposed inheritance tax changes on pensions from April 2027. Mr elby warned that beneficiaries will face additional administrative burdens, with some requiring tax refunds after overpaying income tax, "heaping yet more fiddly admin on taxpayers."

How to claim back overpaid tax on pension withdrawals

Pensioners who have been overtaxed when taking money from their pension can reclaim the excess, but the process depends on their individual circumstances.

• Those who have completely withdrawn their pension pot and are still working or claiming benefits should complete form P53Z.
• If they have emptied their pension but are not working or receiving benefits, they need to submit form P50Z.
• For anyone who has only taken part of their pension, the correct form is P55.

HMRC says refunds are typically processed within 30 days of receiving the correct form. Savers can also wait until the end of the tax year for automatic corrections, but this means a longer delay in getting their money back.

Financial experts advise making a small initial withdrawal to help HMRC set the right tax code before taking larger sums, which can help prevent overtaxation in the first place.