Statements from HMRC & FCA highlight ‘risks’ from pre-Budget rush to access tax-free cash – LCP

In the run-up to last year’s Budget, fears over changes to tax-free pension lump sums triggered a surge in withdrawals, but new statements from HMRC and the FCA warn that such decisions may carry irreversible tax consequences, even if later reversed.

In the run up to last year’s Budget there was a rush of people accessing larger pension pots, with FCA figures showing over 25,000 people accessed pots worth £250,000 or more in the six months to September 2024.  This was an increase of more than 50% on the same period a year earlier.  It is highly likely that many people did so in anticipation of the potential capping or scrapping of the right to take 25% of a pension in the form of a tax-free lump sum (known formally as a ‘Pension Commencement Lump Sum’).

When the 2024 Budget did not make any changes to the rules on tax-free lump sums, there was much discussion as to whether people could use 30-day ‘cancellation rights’ under certain policies to ‘undo’ their decision. 

In response to this, HMRC and FCA have today issued statements (see notes to editors) setting out their position.  Whilst the rules are complex, it seems clear that:

–          Many decisions to take a pension are not covered by statutory 30-day cancellation rights;

–          Where there is a no cancellation right, an individual will have to deal with the tax consequences of their decision, even if the provider agrees to reverse the transaction and put the money back into a pension;

–          In particular, an individual could be treated as having used up some of their lifetime lump sum limit of £268,275, even if the money has gone back into their pension

The statements by HMRC and FCA make it clear that the exact position depends on the exact nature of the transaction and the precise wording of the contract taken out. 

Commenting, Alasdair Mayes, partner at LCP and head of pensions and tax said:

“The latest statements by HMRC and the FCA are a reminder that people should think very carefully before making major financial decisions based on speculation about what might be in the Budget.  In particular, in many cases it may be impossible to undo the tax implications of such a decision if it turns out – again – that there is no Budget change to pension tax relief.  For example, people who try to reverse their decision after a Budget may find that they have irreversibly used up some of their lifetime limit of tax-free lump sums.  The exact rules clearly depend on the precise nature of the transaction and individuals need to be sure that they understand the full consequences of any decision taken in advance of the Budget”