Thousands of pensioners have been handed back £42million in the past four months due to being overcharged by HM Revenue & Customs (HMRC).
The cash is being handed back because HMRC overcharged 13,000 people for accessing their pension pot between September and December last year, and were hit by massive tax bills averaging £3,230 each.
These people then made claims against HMRC for the money.
Analysis by accountants Lane, Clark and Peacock (LCP) said the taxman has handed back £835million in this way since Pension Freedoms started in 2015.
But the real figure is likely to be more than £1billion, as HMRC also repays overpaid tax at the end of every tax year automatically.
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Pension Freedoms are rules letting people aged 55 and above with defined contribution pensions access their retirement pots however they like.
Pensioners can take up to 25 percent of this cash as a lump sum, but if they take more they pay a big tax bill.
What has happened is HMRC has been overcharging pensioners that never took more than 25 percent of their retirement pot out in one go.
LCP partner and former pensions minister Steve Webb is calling for this ‘money merry-go-round’ to stop and for HMRC to stop overtaxing people on pension withdrawals.
Webb said: “It is a disgrace that ordinary savers who want to access their pension savings flexibly are routinely overtaxed and then forced to claim back this excess tax.
HMRC’s approach is to tax first and ask questions later. This ‘money merry-go-round’ where people have large amounts of tax deducted and then have to claim back some of it has gone on long enough."
A HMRC spokesperson said: “Nobody will overpay tax as a result of taking advantage of pension flexibility. Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days.
“Anyone who does not claim will be automatically repaid at the end of the year.”
How to reclaim overpaid tax on pension withdrawals
Obviously one option is just to do nothing, as HMRC promises to repay the cash at the end of each tax year, in April.
But if you need the cash sooner, you have to apply to the taxman.
You can do this by filling out a P55 form or going online and using the Government Gateway.
What are the risks of Pension Freedoms?
The Freedoms are meant to give retirees flexibility in how they handle their retirement cash.
Before Pension Freedoms retirees were much more restricted, and normally used this cash to take out a retirement deal that paid a fixed amount at intervals.
But this ability to take large amounts of pension in cash has led to some pensioners spending their cash before they pass away, leaving them with just the state pension to live on - if that.
LCP have designed a free tool to help savers who are on benefits calculate how much accessing their pension would affect their income.
