HMRC denies U-turn for early pension withdrawals despite budget fears

In the wake of the budget, individuals seeking to take advantage of their pension pots by withdrawing a tax-free lump sum have found themselves unable to backtrack on their decision. Financial advisors saw a surge in clients attempting to get cash out, fearing that the Chancellor might limit or scrap the benefit.

Yet, Rachel Reeves opted not to alter the regulations allowing up to 25 percent of the pension to be taken tax-free, with a ceiling of £268,275. Consequently, those who withdrew funds early to avoid the anticipated budget changes now miss the chance to accrass further value in their pensions.

A number sought to reverse their decisions, but HMRC currently maintains that such reversals are not permitted. Savers argue they acted based on information suggesting a 30-day cooling-off period which included rights to rescind the withdrawal post-receipt.

Contrarily, an HMRC newsletter last week stated the process contravened tax legislation, asserting: "The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored." Angered pension providers have challenged HMRC, demanding a reevaluation or a resolution for individuals potentially deprived of their tax-exempt savings. Providers refer to previous guidance from.

The Financial Conduct Authority (FCA) has stated that consumers who take out "a contract to vary an existing personal pension scheme by exercising, for the first time, the right to make income withdrawals" are entitled to a cancellation period, which they have interpreted to include cash lump sums.

Lisa Picardo, from PensionBee, told the Telegraph: "It is widely understood across the industry that consumers have a right to cancel using a 30-day cooling-off period and preserving their tax-free allowance. HMRC’s recent assertion threatens to undermine the FCA’s principles of consumer duty and is causing uncertainty and harm. We urge HMRC to reconsider its stance and collaborate with the FCA to ensure the financial services industry can continue to fully support and protect consumers."

Earlier this week, Hargreaves Lansdown, a pension firm, decided it would no longer offer its customers a cooling-off period following HMRC’s newsletter. Aviva and Aegon also do not permit the reversal of withdrawals.

Mike Glenister, from pension and investment firm AJ Bell, described HMRC’s rules as "nonsensical". He said: "Entering drawdown and taking your tax-free cash are part of a single, intrinsically linked financial decision. It would therefore be nonsensical to require firms to offer cancellation rights for drawdown without those applying to both the decision to enter drawdown and the receipt of tax-free cash.

"HMRC’s stance risks leading to unnecessary and avoidable consumer detriment. The number of individuals opting to reverse their drawdown decision is due to a genuine change of mind, not for tax benefits. "We are engaging with HMRC on this issue and hope to reach a sensible conclusion that is designed to help give customers the best outcomes,"

Steve Webb, partner at pension consultants LCP, commented: "Under normal circumstances, a consumer would have a right to change their mind about taking out a financial product and could reverse the transaction during a cooling-off period. But this right seems to be clashing with HMRC rules which do not allow people to undo pension withdrawals.

"What is needed is a joint statement from FCA and HMRC making the rules clear so that individuals are not left in a confusing and uncertain position."

James Carter, from pension platform Fidelity, stated: "We understand that HMRC and the FCA are discussing the issue in light of the potential inconsistency between HMRC’s recent statement and the FCA’s rules, and aim to respond again as soon as possible."

An HMRC spokesman confirmed: "We’re in discussions with the Financial Conduct Authority regarding this issue."