Pensioners Encouraged To Take £1 Withdrawal To Avoid Overtaxation

What you need to know...

HMRC has continued to face criticism for its approach to taxing pension withdrawals made under the pension freedoms introduced in 2015. The system routinely applies an emergency tax code to new withdrawals, resulting in initial overtaxation for many savers accessing their pensions flexibly.

This process particularly affects those withdrawing lump sums for the first time, often resulting in excessive tax being deducted up front. Industry commentators warn that the problem persists more than a decade after pension freedoms were rolled out.

Tom Selby, director of public policy at AJ Bell, has stated that despite the time elapsed since the reforms, 'the spectre of pension overtaxation continues to loom over HMRC.' He explained that this approach means many individuals must actively reclaim overpaid tax to recover their funds.

HMRC figures reveal scale of problem

According to the latest HMRC figures, 13,942 forms reclaiming overpaid tax were processed in the first three months of 2026. The average reclaim amount during this period was around £3,165.

Since the introduction of pension freedoms in 2015, a total of approximately £1.6 billion has been returned to individuals due to overtaxation on flexible withdrawals. Experts note that HMRC statistics likely underestimate the overall issue, as these figures reflect only those who complete and submit reclaim forms.

Many others may wait for HMRC to automatically correct their tax position at the end of the tax year, which can cause significant delays in recouping funds.

Why a small withdrawal can help

Financial planners suggest that savers intending to withdraw a significant sum from their pensions may avoid a large initial overtaxation by taking a small, nominal withdrawal such as £1 first. This initial transaction enables HMRC to establish the individual’s correct tax code before a subsequent, larger withdrawal is made.

Tom Selby advises, 'One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.'

Guidance for pensioners approaching retirement

Those born before 1960, many of whom are now retiring or have recently retired, are among those most likely to benefit from this guidance. The State Pension alone is widely recognised as insufficient for many, leading to increased reliance on private pension savings.

Ensuring that withdrawals are taxed correctly is crucial for these individuals, given the pressure on retirement income caused by rising living costs.

Pensions specialists also note that state pensioners eligible for private pension withdrawals should maintain awareness of HMRC’s reclaim process and take proactive steps to avoid unnecessary financial disruption.

Administrative relief and reclaim process

Savers who do find themselves overtaxed on a withdrawal can reclaim excess tax by completing one of three HMRC forms, depending on the circumstances of the withdrawal. HMRC advises that most refunds will be processed within 30 days.

If individuals do not submit a reclaim form, HMRC will usually refund excess tax at the end of the tax year, although this process can take longer. Industry experts caution that these administrative requirements can create inconvenience for taxpayers and lead to delays in accessing funds.

'Many will be reliant on HMRC putting their affairs in order after the end of the tax year,' Selby added.

Future tax changes on pensions

Further complexity is expected as inheritance tax changes on pensions are due to take effect in April 2027. The government’s planned reforms may lead to additional cases where beneficiaries inadvertently overpay income tax and have to navigate refund processes.

Selby has stated that 'some beneficiaries may find they overpay income tax in the process and will need to claim a refund, heaping yet more fiddly admin on taxpayers.' The introduction of these changes has prompted renewed calls for simplification of pension taxation.