I took 25% tax-free money out of my pension earlier than the Budget – can I put it again?

Tax-free cash: Many people made  pension withdrawals as a precautionary measure before the Budget

I took a 25 per cent tax-free lump sum out of my pension before the Budget. 

I was worried about losing the chance to do so if the rules changed, but they did not and now I don’t know what to do with the cash. 

Can I put it back and if not, what are my options?

Tanya Jefferies, of This is Money, replies: Fears the Chancellor would limit the amount of tax-free cash pension savers can take from their pots were not realised in the Budget.

But many people made withdrawals as a precautionary measure beforehand, despite warnings that they could miss out on investment growth under the tax protection of a pension in future.

It is worth noting that if you tapped a defined contribution pension for any amount over and above your 25 per cent tax free lump sum, you are only able to put away £10,000 a year and still qualify for tax relief on contributions from then on.

We asked a pensions expert to run through what people who took tax-free lump sums before the Budget can consider doing now.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explains five things to think about.

1.  Try to cancel

If you have recently put in a request with your provider, then you can see if you can reverse the instruction.

Your provider may operate some kind of cooling-off period, so if you fall within it then this could be an option for you.

There will be conditions attached though – it will depend on your provider and your circumstances, including how and when you took your tax-free cash.

Helen Morrissey:  Recycling rules were put in place to stop people taking their tax-free cash and reinvesting it into a pension for an extra slice of tax relief

2.  Avoid recycling trap

If you are looking at reinvesting the money back into your pension, you will need to be aware of the rules around doing so otherwise you risk being hit with a tax charge.

Recycling rules were put in place to stop people taking their tax-free cash and reinvesting it into a pension such as a Self-Invested Personal Pension (Sipp) for an extra slice of tax relief.

There are a number of criteria laid out in the rules all of which need to be met for it to be deemed a breach – they are as follows.

– Tax-free cash is taken.

– Tax-free cash taken exceeds £7,500 (including any other tax-free cash taken in past 12 months).

– Contributions into pensions are significantly higher than what’s expected. This applies to personal, employer and third-party contributions.

– The value of the contribution increase is more than 30 per cent of the tax-free cash taken. The recycling rules take into account contributions paid in the tax year in which the tax-free cash is taken, as well as the two tax years either side of this.

– Recycling was planned by the member – the onus is on HMRC to prove it was a conscious decision.

If you are deemed to have breached the rules, you could be hit with a 55 per cent tax charge on the value of your tax-free cash.

So, any decision to reinvest in your pension needs to be carefully considered and it’s well worth getting the advice of a financial adviser to make sure you stay on the right side of the rules.

3. Help a family member

It’s important to say that these rules cover contributions to your own pension and not those to another person, so it is possible that you can use the money to top up the pension of a spouse or child for instance and improve your overall family’s financial resilience.

You can reinvest up to £2,880 per year into the Self-invested personal pension (Sipp) of a non-working spouse or child and they will receive tax relief topping it up to £3,600.

4. Invest or save

If you don’t opt for any of the above routes, then it’s worth considering what other investment options are available to you.

You don’t want to take tax-free cash and then just leave it in an easy-access bank account where it earns a poor rate of interest and leaves you at risk of dipping into it frequently.

Investing it in a stocks and shares Isa means you may benefit from long-term investment growth and the income you take can be taken tax free.

If you do decide to put a portion of your money in a savings account, then you could use a savings platform to make sure you are getting competitive interest rates.

If you are able to lock some of your money away for a period of time – say two years – then you will also be able to guarantee the rate at a time when the Bank of England is likely to be making cuts so it’s important to do your homework on what is available out there.

> How to choose the best (and cheapest) DIY investing Isa

> Check our best buy savings tables

5. Make gifts

Finally, from April 2027 pensions become part of your estate for inheritance tax purposes.

This is expected to change people’s behaviours in terms of encouraging them to mitigate this tax by taking an income from their pension rather than from other assets.

We could also see an increase in giving money away while they are still alive rather than leave it to someone after they die, and there could be renewed interest in annuities.

If you were considering making gifts to a loved one, then this could be a consideration, but you will need to make sure that you don’t give away too much and leave yourself short of cash in later life.