HMRC has warned that it will challenge people who have tried to return tax-free lump sum withdrawals from their pensions under cancellation rules.
The taxman and the FCA clarified last month that taking a 25% tax-free lump sum out of your pension cannot be undone, amid confusion around broader cancellation rules that allow consumers to undo certain financial transactions within 30 days.
It came after a surge in withdrawals from pensions ahead of last year’s Autumn Budget amid speculation that the government might reduce the amount that can be withdrawn tax-free, which did not happen.
Many people then attempted to cancel their withdrawals under the cancellation rules, but HMRC and the FCA said this was a misunderstanding.
In its latest newsletter today, the taxman said: “We may challenge alternative interpretations of the tax consequences of tax-free lump sums that have been returned after 5 December 2024, when the position was made clear.
“We expect registered pension schemes to tell members of their reduced lump sum allowance and lump sum death benefit allowance or report unauthorised payments in the usual way.”
James Jones-Tinsley, a pensions technical specialist at Barnett Waddingham, said: “Thousands of consumers, particularly those who acted hastily before the 2024 Budget, may now face irreversible reductions in their tax-free allowances, despite attempts to undo their withdrawals.”
