This £1 pension trick could save retirees from being unfairly overtaxed

One pound might not sound like much, but for thousands of pension savers, it could be a powerful tool to sidestep one of the tax system's long-standing glitches. The £1 trick could save retirees from being unfairly overtaxed, and waiting months to get their own money back. Between July and September 2025, Britons reclaimed nearly £50million in overpaid tax on pension withdrawals, new figures from HM Revenue and Customs show.

More than 13,700 savers submitted reclaim forms, each pocketing an average refund of £3,539. Since the Pension Freedoms legislation was introduced in 2015 (giving people more flexibility to access pots from the age of 55), total tax repayments have soared past £1.5billion.

The problem stems from how HMRC taxes the first flexible withdrawal from a pension pot. The system applies a "Month 1" emergency code, dividing annual allowances by 12 and taxing the withdrawal as though it were one of 12 regular monthly payments.

The result is a larger-than-necessary tax hit, often leaving people thousands out of pocket. While regular income drawdowns tend to sort themselves out through HMRC's systems during the course of a year, one-off withdrawals work a bit differently.

Unless retirees actively reclaim the money using one of three forms (P55, P53Z, or P50Z, depending on their circumstances), they won't see their refund before the end of that tax year at least.

But by withdrawing a nominal amount first, £1 for example - or the smallest amount that you're allowed to withdraw - you can avoid the problem entirely. Making the tiny "test" withdrawal before accessing a larger sum prompts HMRC to apply the correct tax code from the get-go.

Financial expert Tom Selby of AJ Bell says it helps the system recognise that the following withdrawal isn't a regular income, ensuring the right level of tax is deducted straight away. A decade after the introduction of pension freedoms, it's astonishing that the system is still catching so many people out.

But until reforms fix the process for good, that small £1 move could mean the difference between a fair tax bill and a tedious wait for a refund. In some cases, a pound really can go a long way.

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DEAL OF THE WEEK

Asda has brought back its £1 "winter warmer" café scheme for the over 60s. As of November 1 and until the end of February, Asda is offering people aged 60 and over the chance to enjoy soup, bread and unlimited tea or coffee for just £1 in any of Asda's 212 cafes.

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If you've moved house or switched energy suppliers recently, you might unknowingly have a little pot of cash waiting for you. It's not a scam or a rebate you need to haggle for, it's simply your own money sitting in an old energy account.

According to Ofgem, there's a huge amount of it out there - almost £240million spread across 1.9 million forgotten accounts. The energy regulator wants households to check their old bills and accounts, especially if they've moved within the last five years.

Tim Jarvis from Ofgem reassured that suppliers do "work very hard" to return money to people when they close an account.

He said: "Due to the rules Ofgem has put in place, it's in their interests to do so." However, he warned: "Without the right contact details, they're stuck. That's why we're working together to get the message out and return money to the people entitled to it."

Suppliers say they manage to return around 90% of closed account balances automatically, but the remaining 10% gets lost when people forget to update contact details or cancel their direct debits too soon.

It's surprisingly easy for a few pounds, or even a few hundred, to get left behind. But the problem is easy to fix. Simply get in touch with your old supplier and share your previous address, account number (if you can find it), and current contact details, or log into any old online portals to check for closing bills.

It only takes a few minutes. And checking now could lead to a welcome income boost just in time for winter. With some people reclaiming more than £100, that forgotten credit could make next month's heating bill sting a little less.