HMRC 30-day rule hits state pensioners who withdrew 25% of pension pot

State pensioners who rushed to withdraw 25% from their pots over fears of Budget taxation are now in a pickle, facing potential tax bills from HMRC due to a little-known 30-day rule. Generally, pensioners can pull up to 25% from their retirement fund tax-free, capped at £268,275 and without affecting their Personal Allowance—tax is simply deducted from the remainder.

With many financial companies offering a 30-day grace period for those taking this tax-free sum, including the option to return it without penalty, participants felt secure. However, HMRC has dropped a bombshell on pension providers: don't let savers put back their tax-free cash or face "unauthorised payments charges".

According to the government agency, FCA regulations state cooling off rights are only applicable when purchasing a new product. Payments like pension commencement lump sums (PCLS) and uncrystallised funds pension lump sums (UFPLS), it claims, don't count as 'new products', so regret and reversal isn't an option.

READ MORE: Star Flyer witness describes smash as ride 'lost control and dropped to ground'

Get breaking news on BirminghamLive WhatsApp

Hammering the point home, HMRC's latest pension newsletter included a stark reminder: "The payment of a tax-free lump sum cannot be undone and the member's lump sum allowance will not be restored."

They conclude with a further clarification that such lump sums must be tested against the allowance at the time they're taken from the pension scheme, reports the Express.

"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."

Before the autumn Budget, there were whispers that Chancellor Rachel Reeves might reduce the tax-free pension lump sum allowance to tackle a rumoured £40 billion deficit. These speculations led to a spike in people asking to withdraw from their pensions, but ultimately, the Budget revealed no changes to the tax-free lump sum regulations.

The FCA's website notes consumers have a cancellation period when they first start drawing from their pension income, although it doesn't mention tax-free lump sums specifically. From HMRC: "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."