HMRC and FCA clarify rules on tax-free pension cash and cooling-off rights

Pension savers who take money out of their pension as a tax-free lump sum are being warned they usually cannot change their mind once the payment has been made.HM Revenue & Customs (HMRC) and the Financial Conduct Authority (FCA) have both issued statements to clear up confusion after reports of people rushing to take cash from their pensions before possible Budget changes in November.

HMRC has confirmed that once you take your tax-free lump sum, often called a ‘pension commencement lump sum’, the tax position is not reversible. You cannot usually give the money back and expect the tax-free allowance to be reset.

Even if your pension provider offers a cooling-off or cancellation period, this does not cancel the tax event. The clarified rules mean HMRC will still count the lump sum as having been taken, using up part of your tax-free allowance.

No cooling-off rights

The FCA has explained that normal cancellation rights, such as the 30-day cooling-off period for some pension products, do not apply just because you have taken tax-free cash.
These rights only cover certain contracts, such as joining a new pension or transferring to a new provider. They do not give you the ability to reverse the tax effects of a withdrawal.

There have been widespread reports in the media this year that over-55s have been taking money out of their pensions early, worried that the Government might cut tax-free allowances.
While it is unclear how many assumed they might be able to reverse the withdrawal tax-free, the announcement from both HMRC and the FCA indicates concern that many have misunderstood the rules. HMRC and the FCA have now made clear that this is not possible in most cases.

If you try to return the money, your tax-free allowance may still be reduced. You could also face an unexpected tax charge, such as the Money Purchase Annual Allowance (MPAA), if you still plan on contributing to your pension in the future.

Plan before you act

This is a reminder that pension decisions can have long-lasting tax effects. If you are thinking about taking a tax-free lump sum:

  • - Check how it will affect your future withdrawals and allowances.

  • - Don’t assume you can reverse the payment later if you change your mind.

  • - Be extremely cautious about rushing to take money because of rumours about rule changes.

Because the rules are complex, it’s essential to speak to a regulated financial planner before making any decisions. A financial planner can help make plans and mitigate tax liabilities while making sure your retirement savings and long-term plans stay on track.

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The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. Welby is a trading name of Welby Associates Wealth Management Ltd Company Registered Number NI630504 who is authorised and regulated by the Financial Conduct Authority, FCA register number 697372. The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service please visit www.financial-ombudsman.org.uk

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