State pensioners accessing their retirement funds flexibly are being encouraged to employ a simple £1 strategy that could prevent them from being overcharged approximately £3,100 in tax.
Department for Work and Pensions claimants can utilise this straightforward technique to sidestep significant overpayments when drawing from their pension pots.
The method involves making the withdrawal before taking larger sums, which helps establish the correct tax code with HMRC.
Without taking precautionary steps, retirees risk facing emergency tax deductions that leave them substantially out of pocket until the revenue corrects their position.
Revenue data reveals the scale of the problem, with close to 14,000 individuals forced to reclaim overpaid tax after accessing their pensions flexibly during the first quarter of this year.
Wealth management firm Quilter reports that more than £44.1million was returned to savers in just three months.
Adam Cole, retirement specialist at Quilter, notes the typical refund now exceeds £3,160.
“That suggests fewer people may be caught by emergency tax, but when it happens the sums involved are larger, leaving retirees out of pocket while they wait for HMRC to return their own money,” Mr Cole said.
State Pensioners have been urged to take out £1 to avoid paying £3,100
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Tom Selby, director of public policy at AJ Bell, points to enhancements in the Government’s tax code procedures that now enable swifter transitions from emergency codes to accurate taxation rates.
For those planning a single withdrawal within a tax year, Mr Selby recommends taking out a token amount such as £1 beforehand to prevent excessive deductions.
“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days,” he added.
Not doing so could cost pensioners thousand
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“If you don’t do this, the revenue says it will put you back in the correct tax position at the end of the tax year.”
The PAYE system’s fundamental design creates ongoing difficulties for pension savers, according to Mr Cole.
“PAYE was designed for predictable monthly earnings, not ad hoc pension withdrawals, and as a result it continues to generate avoidable overpayments that have to be corrected after the fact,” he said.
Mr Cole urged retirees to consider their approach thoroughly before accessing funds, noting that seeking professional guidance can help prevent upfront tax overpayments.
“Until pension taxation better reflects how people actually access their money in retirement, thousands of savers will continue to face unnecessary complexity and cashflow disruption,” he added.