The £1 pension trick that could save you thousands

Over-55s could dodge paying a hefty emergency tax by taking advantage of a cheap and easy trick to simplify pension withdrawals. The introduction of pension freedoms in 2015 gave over-55s new powers to make withdrawals from their pensions, with the first 25% tax-free and the remainder added to yearly incomes and taxed at the highest rate. But the withdrawals normally trigger an emergency tax from HMRC - resulting in an overall charge that exceeds the amount savers would have owed.

Financial experts told Telegraph Money that HMRC's "surprise" at the withdrawal could leave people "paying tax at much higher rates than they ordinarily would" - especially when trying to take out a lump sum. While the excess tax can be reclaimed by filling out a form, it could also be avoided entirely, by taking a small amount, as low as £1, out of your account first, triggering a tax code from HMRC. After the notional withdrawal, a greater sum can be issued and will be taxed at the normal rate.

David Gibb, chartered financial planner at Quilter Cheviot, said: "When someone makes their first flexible pension withdrawal, HMRC may apply emergency tax, assuming it's a monthly payment rather than a one-off sum.

"This happens because HMRC doesn't yet have an up-to-date tax code for the individual's pension provider, meaning they default to a higher estimated rate due to a quirk in how the PAYE system works."

"When you're taxed on an emergency basis, you're treated as though the same amount will be taken on a monthly basis - it doesn't take into account that this payment is a one-off," Helen Morrissey, pensions and retirement spokesperson at Hargreaves Lansdown added.

"According to calculations from Hargreaves Lansdown, it would land a saver making a £20,000 withdrawal with an emergency tax charge of £7,379. However, assuming the saver paid basic-rate tax, they should only need to pay £1,484."

Tom Selby, director of public policy at AJ Bell, said the way emergency taxation was applied to the withdrawals was "outdated" and "unacceptable".

"We have only just blown out the candleson the cake celebrating 10 years of pension freedoms," he said. "It is simply unacceptable that, after all this time, the government has still not managed to adapt the tax system to cope with the fact that Britons are able to access their pensions flexibly from age 55.

"Instead [it] hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days."

While the excess money can be reclaimed, Clare Moffat, pensions expert at Royal London, said owing more than expected, even in the short-term can be an increased burden for savers.

"A little bit of forward planning means they can save waiting for that tax money," she said. "They can go on that holiday or buy that new kitchen."