HMRC has warned pension providers that they should not allow savers to return their tax-free lump sums to their retirement pots or they could face “unauthorised payments charges”.
However, experts have hit back stating the guidance, released in HMRC’s recent pensions newsletter, contradicts the common industry practice of offering a 30-day cooling-off period for such withdrawals.
Most financial firms have allowed savers a 30-day cooling-off period after they request the tax-free allowance, which includes the right to put money back if it’s been received.
However, the opportunity to reverse the decision – and retain the tax-free perk – now appears to go against the tax authority’s rule
HMRC said: “The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored. The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.
“Unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met.”
This creates significant confusion for savers who withdrew their pension lump sums before the autumn Budget amid reduction fears and were told they had time to reverse their decision.
HMRC said the payment of a tax-free lump sum cannot be undone and will not be restored
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Prior to the autumn Budget, speculation mounted that Labour Chancellor Rachel Reeves might slash the tax-free pension lump sum allowance to address a reported £40bn shortfall.
Current rules allow savers aged 55 and over to withdraw 25 per cent of their retirement pot tax-free, up to £268,275.
Reports suggested ministers had consulted with a major pension provider about reducing this limit to £100,000.
These rumours triggered a surge in withdrawal requests, with Bestinvest reporting that numbers more than doubled in October compared to the previous year.
However, when the Budget was delivered on October 30, no changes to the tax-free lump sum rules were announced.
The FCA’s website states consumers are entitled to a cancellation period when first exercising pension income withdrawals, though it doesn’t specifically address tax-free lump sums.
However, HMRC have confirmed: “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.”
Different pension providers have taken varying stances following HMRC’s guidance.
Hargreaves Lansdown has suspended its policy of allowing pension customers to reverse withdrawals of tax-free lump sums.
Some providers, including Aegon and Aviva, never offered the option to return lump sums.
However, Abrdn, Interactive Investor, Vanguard and Bestinvest have confirmed that customers who returned their lump sums have not lost their allowance and can withdraw it tax-free in the future.
Other firms that permit reversals within the 30-day window have not clarified whether this will affect future allowances.
Industry experts are calling for urgent clarification from both HMRC and the FCA on this issue.
Andrew Tully, of Nucleus Financial, said: “When a customer accesses their pension benefits for the first time, for example by taking drawdown, this is viewed as entering a contract to vary their existing personal pension scheme. This contract is cancellable.”
He added that discussions are ongoing with industry bodies and other firms, with approaches being made to both HMRC and the FCA for clarity on their positions.
A source at a major pension provider who wished not to be named said: “HMRC’s guidance on this has really frustrated us, and we intend to push back on it hard.”
The source criticised the timing of HMRC’s intervention, noting they “stayed silent on the issue of reversing withdrawals for five weeks” after the Budget.
The FCA’s website states consumers are entitled to a cancellation period when first exercising pension income withdrawals, though it doesn’t specifically address tax-free lump sums.
The source added: “A sensible outcome would be a grace period where they turn a blind eye to people that have reversed their tax-free lump sum withdrawals.”