Royal London has called on the taxman to stop applying an emergency tax code to pension withdrawals in evidence to parliament's pension freedoms inquiry.
Currently when an individual withdraws a lump sum from their pension they are usually taxed on an emergency tax code which results in an over-payment.
The provider said HM Revenue & Customs has paid out 10,000 refunds because of this tactic, worth a total of £26 million.
It claimed if refunds continue at this rate then total over-taxation will reach £100 million per year.
In its submission to the work and pension committee's pension freedoms inquiry Royal London said HMRC should take only standard rate tax, and collect any extra tax due through the usual end-year tax return process.
Steve Webb, Director of Policy at Royal London (pictured) said: ‘The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC can knowingly overtax people to the tune of £100 million per year and expect thousands of individuals to know which form to fill in to get their money back. Too often, HMRC’s approach is to tax first and ask questions later, and this must stop’.
The insurer has also detailed a list of other changes it has called for in its response.
- Earlier contact with pension savers, rather than a ‘wake-up’ pack six months before retirement when many will have already made up their mind; Royal London said it backs the idea of a ‘mid-life MOT’ where financial and career plans can be reviewed at a much earlier stage. The mid-life MOT was put forward by John Cridland in his independent review of the state pension earlier this year.
- Enhanced access to advice, including more support for employers who offer workplace advice and piloting vouchers for financial advice;
- More powers to pension schemes and providers to block pension transfers where they are concerned about the risk of scams;
- A firm commitment by the government that it will be legislating to require all pension schemes and pension providers to supply data to the proposed pension dashboard.
In September the influential committee of MPs announced an inquiry into pension freedoms which will look at the support people have when making retirement decisions and specifically at scams.
It will look at what people are doing with their retirement savings, how they decide to do it, the information and guidance available and how the pension product market works.
In an article for New Model Adviser® the committee's chair Frank Field called on advisers to contribute by submitting evidence to the inquiry.
He said: 'The advice and guidance "offer, public and private, and how people are taking up that offer, are front and centre to the inquiry,' adding 'we would like to solicit evidence from New Model Adviser® readers, and most definitely from advisers themselves.'
To make a written submission to the inquiry click here. The deadline is today.