Pension providers seek HMRC clarity on tax-free cash decisions

Pension providers are calling for clarification from HMRC after it ruled that customers who withdrew their tax-free cash in the lead-up to the Autumn Budget cannot reverse their decisions. 

Amid speculation about potential changes to pension lump sums ahead of the Autumn Budget, some firms advised clients to withdraw their tax-free lump sums. When the anticipated changes were not announced, several providers informed advisers that clients could reverse their tax-free withdrawals within a 30-day cooling-off period. 

However, HMRC has since clarified that cooling-off rights under Financial Conduct Authority (FCA) rules apply only to new product purchases, such as annuities. They do not extend to tax-free cash withdrawals from existing pension contracts. As a result, the payment of a tax-free cash lump sum cannot be undone, and the member’s lump sum allowance will not be restored. 

HMRC's position on cooling-off periods 

In a recent newsletter, HMRC stated: 

"We are aware that some schemes are being asked by members how they can return payments of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) that they took because of speculation about changes that might occur affecting their pensions in the 2024 Autumn Budget. 

Some pension contracts and policies allow for a cooling-off period. Under Financial Conduct Authority (FCA) rules, cooling-off rights apply to the purchase of a new product only, for example, the purchase of an annuity. The payment of a PCLS or UFPLS is not a new product, which means that cooling-off periods do not apply to those payments." 

This statement has left many pension providers seeking further clarity. According to CityWire, most platforms have operated since 2015 under the assumption that taking tax-free cash and entering drawdown are part of the same financial decision. Consequently, these platforms offer cancellation rights for both actions. For other pension decisions, such as transfers or annuity purchases, cooling-off periods are generally allowed. 

Recycling payments back into pensions 

In the same newsletter, HMRC highlighted potential unauthorised payment charges if tax-free lump sums are reinvested into pensions and meet specific conditions for recycling. 

For recycling rules to apply, the following conditions must be met: 

• The individual has received a tax-free lump sum. 
• The lump sum exceeds £7,500 over 12 months. 
• As a result, pension contributions have increased by more than 30% compared to expected levels.
• The additional contributions are more than 30% of the tax-free lump sum. 
• The recycling was pre-planned. 

If these conditions are met, the tax-free lump sum may be treated as an unauthorised payment and associated charges could apply. 

Looking ahead

 At The Private Office, we continue to monitor developments surrounding this issue, along with ongoing consultations about pensions becoming part of taxable estates for inheritance tax from April 2027. As the landscape evolves, we are committed to keeping our clients informed and helping them navigate these complex matters.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

Pensions are a long term investment and any income derived from them is not guaranteed, the value of these investments can go down as well as up and you may not get back what you originally invested. 

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice. Please note that tax is subject to change.

The information in this article is correct as at 12/12/24.

Sources:

• https://citywire.com/new-model-adviser/news/hmrc-says-tax-free-speculation-carries-risk-as-providers-seek-clarity/a2456273
• https://www.gov.uk/government/publications/pensions-schemes-newsletter-165-december-2024/4c56e112-bc27-4b38-b7be-5c9d0c2e2da5#tax-treatment-of-tax-free-lump-sums-paid-back-into-a-registered-pension-scheme