HMRC denies U-turn for early pension withdrawals post-budget, regardless of no adjustments to tax guidelines

The decision means that those people who tried to beat the feared budget change and took their lump sum out early have lost the opportunity to leave the money in their pension pot in the expectation it would continue to grow.

Pension pot plunderers who dashed to snatch their tax-free lump sum ahead of the budget have hit a wall, as it turns out they can’t backtrack on their decision. In the run-up to the big financial reveal, savers saw a flurry of folks withdrawing money, fretting that the Chancellor might slap a limit or slash the benefit.

But Rachel Reeves left the 25% withdrawal rule untouched, with a cap at £268,275. This left those who jumped the gun to dodge the anticipated budget bullet in a bit of a pickle, having lost the chance to let their pension pile grow. Some tried to rewind their hasty move, but HMRC isn’t having any of it, insisting reversals are off the table.

Savers are up in arms, claiming they were led to believe they had a 30-day cooling-off period, including a U-turn ticket after pocketing the payout. Yet, HMRC dropped a bombshell in a recent newsletter, declaring such practices against tax laws and stating unequivocally: “The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored.”

Pension providers are fuming, demanding HMRC either do a volte-face or cough up a fix for savers who may have kissed goodbye to their tax-free treasures. Providers are pointing fingers at 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 believe includes 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 allow 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 Numerous individuals who opt to reverse their drawdown decision do so because they have genuinely changed their mind and are not seeking, or receiving, any tax benefit for doing so. 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, stated: “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, of pension platform Fidelity, said: “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 said: “We’re in discussions with the Financial Conduct Authority regarding this issue.”